The first 800-pound gorillas of the business-to-business (B2B) E- commerce world arrived on the same day last November, when, hours apart, General Motors Corp. and Ford Motor Co. announced they were establishing Internet trading exchanges for their supply chains. Each giant automaker annually buys more than $80 billion worth of raw materials, vehicle parts, and MRO (materials, repair, and operating) supplies from more than 30,000 suppliers. By shifting that business to the Web, they said they could eventually save billions in lower prices, transaction efficiencies, and supply-chain improvements.
That was just the start. In January, oil giant Chevron announced an open exchange for the oil and gas industry, called Petrocosm Marketplace; it has since been joined by Texaco. On February 25, GM and Ford declared that they intended to combine their efforts and that DaimlerChrysler would join them, forming "the world's largest [Internet-based] virtual marketplace." Total direct and indirect procurement spending of the Big Three: $240 billion a year.
Après nous, le déluge. Three days later, Sears, Roebuck and Co., the second-largest retailer in the United States, said it would form a global retail exchange in partnership with Europe's largest retailer, Carrefour; their exchange will handle the $80 billion in purchases those companies make from their 50,000 suppliers. (They have since been joined by U.K. retailer J Sainsbury Plc and Germany's Metro AG.) In London, Royal Dutch/Shell Group announced a procurement exchange for energy and petrochemical companies; it's scheduled to go live on July 1.
On March 28, a consortium consisting of Boeing, Lockheed Martin, BAE Systems, and Raytheon said it would launch a summer blockbuster for the global aerospace and defense industry, which spends $400 billion a year on direct and indirect supplies, from a network of 37,000 suppliers. A day later, 15 electric and natural-gas companies, including Cinergy, Consolidated Edison, Duke Energy, and PG&E, announced the formation by June of a trading exchange for the utility industry.
Real money is coming to the Web, and in a hurry. In the past two years or so, dozens of independent B2B hubs have popped up, targeting various industries, enabling participants to pare procurement and supply- chain costs (see "The World Is Enough," CFO, January). Now, enticed by the added enrichment of royalties and initial public offerings, large companies themselves are getting in on the action, from agriculture to retail. Forrester Research Inc., in Cambridge, Massachusetts, predicts that Web exchanges will account for 53 percent of all online business trade by 2004, spurring B2B E-commerce volume to $2.7 trillion. Some visionaries foresee the eventual coalescence of these virtual marketplaces into one vast electronic agora.
But in order to turn memos of understanding into B2B hubs, companies must overcome numerous technological obstacles. They can build their digital fields of dreams, but there's no guarantee suppliers will come; participation won't be mandatory. And given the collaboration of huge firms in the same industries with tremendous purchasing power, trading exchanges will have to pass muster with antitrust regulators.
Deals On Wheels
All of the promise and perils of Web exchanges is present in the formation of the as-yet-unnamed Big Three hub.
The individual exchanges-- GM's TradeXchange and Ford's Auto- xchange--have been live since January. By April, GM had commitments from 100 big indirect suppliers to join its hub, according to Doug Maulbetsch, CIO of the exchange. TradeXchange handles three types of transactions: catalog procurement and requisitioning (there are more than a dozen catalogs online, listing some 350,000 nonproduction items), auctions, and reverse auctions. When GM auctioned off 30 stamping presses, netting over $3 million, "we had over 100 participants in that activity; normally we might have only 10," says Maulbetsch. In February, GM's Isuzu division bought $147 million worth of rubber seals through reverse auction.
Exchanges charge a small fee for each transaction, but in return, they offer suppliers two large benefits, says Maulbetsch. "One, [suppliers] now have a very low-cost way to interact electronically with their primary trading partners," he says. "Two, we are encouraging our suppliers to adopt the exchange to manage their own supply chains, and reap the same type of benefits the OEMs are reaping." Eventually, the Big Three exchange will provide forecasting tools and point-of-sale information "to give suppliers visibility to true demand," says Maulbetsch. Automakers will post production schedules on the exchange and ask suppliers to evaluate them. Logistics services will enable suppliers to track and trace inbound and outbound shipments, in real time.
"We are making a substantial investment [in the exchange]," says Maulbetsch, "and we are offering it to [trading partners] to leverage it."
Such leverage has a huge upside. Analysts Gary Lapidus and Chris Laporte, at Goldman, Sachs Investment Research, in New York, estimate that improvements in supply-chain management made possible by the connectivity of the auto exchange could eventually result in a cost reduction of a whopping $1,064 per vehicle. The savings would come primarily in the form of lower inventory, scrap, rework, and administrative costs; increased labor and asset utilization; and the alignment of all material spending with low-cost suppliers.
But the auto exchange has its skeptics. One is Kevin Prouty, a senior analyst at AMR Research Inc., in Boston. "I don't see more than 15 percent [of the automakers' direct and indirect procurement] being done end-to-end online for the next two years," he predicts. Also, he says it will take at least three or four years to deliver functionality such as demand planning or quality management on the Web.
Prouty, a former plant manager for a Big Three supplier, says he's seen a lot of collaborative industry initiatives "degenerate into the World Wrestling Federation," and he's not optimistic that this latest, greatest joint venture will fare much better. One tussle concerns the enabling technology of the exchange. GM's technology partner in TradeXchange is Commerce One Inc., of Pleasanton, California. Ford, on the other hand, has partnered with Redwood Shores, California- based Oracle Corp. Both vendors are minority investors in the new exchange, which has to decide which pieces of whose technology to use (see "The Competition," page 86).
Meanwhile, DaimlerChrysler brings SAP, its enterprise resource planning provider, to the venture. "SAP may not get an equity share, but it will get big input," says Prouty.
While the OEMs wrangle over new-technology issues, many suppliers aren't ready to give up their existing technology. Large, tier-one suppliers have a lot of money invested in electronic data interchange (EDI), which continues to serve their most critical needs. "They don't want to have to come up with multiple standards" to participate in exchanges, says Prouty, "and they think they can manage their supply chains better [themselves]."
About 500 suppliers account for the majority of the automakers' procurement volume, adds Ken Vollmer, senior industry analyst at Giga Information Group, in Cambridge, Massachusetts, and some of them have said publicly that they will build their own exchanges. It's "too soon to say" how many of these suppliers will use the Big Three exchange, says Vollmer.
In the past, smaller suppliers haven't been able to afford EDI, so an auto Web exchange would seem to be an ideal solution for them. But EDI has been adapted to the Internet, too. Vollmer points out that the Advanced Network eXchange, a virtual private network for the industry sponsored by the Automotive Industry Action Group, a technology consortium, now provides a "much more cost-effective" form of EDI for small trading partners. They can dial into the system via an Internet link and see a Web-based HTML or XML form, which the system translates into EDI formats, says Vollmer.
One of the biggest suppliers to the auto industry, Toledo-based Dana Corp. (1999 sales: $13.2 billion), is taking a wait-and-see attitude toward the Big Three exchange. "They're still working through their business model," says Jim Woodward, vice president and director of E-business. "We have to understand what the real benefit will be to our shareholders."
Dana, which will continue to use its long-established EDI links to the Big Three, intends to receive shipping information through the exchange. Woodward says one of the exchange's biggest benefits will be to "force the issue of a standard communication protocol for the auto industry, something suppliers have wanted for years."
But Dana doesn't see any need to connect its own internal E- procurement system, which is being rolled out worldwide to more than 300 purchasing sites, to the auto exchange. The company already buys nonproduction supplies online from vendors such as Boise Cascade Corp. and W.W. Grainger Inc.; it won't buy them through the exchange. "We'd have to understand what the services would be for the transaction fee," says Woodward.
Nor will the kind of highly engineered, high-value-added products that Dana makes, such as axles, be sold at auction on an exchange. "There are only three independent axle producers in the world," notes Woodward.
"We'll participate in the Big Three exchange," he says. "But other [Dana] customers won't. Volkswagen won't. Mack [Trucks] won't. The key is, there's not going to be one huge exchange."
Optimizing, Not Squeezing
It will be hard to convince smaller suppliers, particularly commodity suppliers, that the auto exchange is not simply a means of squeezing their margins, but rather a vehicle for optimizing the supply chain. As for tier-one suppliers, "If a Johnson Controls or a Lear saves $10 from a supplier [on the exchange], will the OEM expect part of that savings to be passed along?" asks Prouty. "It's the 'looking-over-the- shoulder' syndrome. It's the biggest political issue. It's like paying someone to hit you over the head."
The corporate sponsors of Web exchanges squelch any hint of bullying or, for that matter, collaboration. They compare the exchanges to shared utilities, such as a telecom network. "We don't see exchanges as [opportunities for] gain," says Clive C. Mather, CEO of Shell Services International, the IT arm of Royal Dutch/Shell. "We see them as giving industries like ours a lower overall cost base, for all participants to improve their business processes considerably."
Royal Dutch/Shell, which spends more than $40 billion a year in support of operations in more than 120 countries, hopes its exchange will help it reach its year 2000 target of $4 billion in cost improvements. The exchange won't be Shell's private reserve, says Mather; "we're trying to create an industry exchange, with many other partners." Shell is succeeding; in April, it was joined by 13 other energy and petrochemical companies, including BP Amoco and Dow Chemical. Collective annual procurement spending: $125 billion.
Still, the bugaboos of data transparency and price fixing concern regulators. In March, the Federal Trade Commission revealed that it had started an informal antitrust review of the Big Three exchange. The FTC declines to comment on the inquiry. "We fully intend to abide by all legal requirements, and we don't expect any negative repercussions from any investigation," says a GM spokesperson.
The Big Three have already stated that they won't aggregate their production purchases, says Woodward. But antitrust experts point out that companies could use exchanges to signal prices. "The government needs to set guidelines where the channel masters have a vested interest," says Prouty, "and quickly."
Many if not most exchanges will become independent companies. The aerospace and defense marketplace, for instance, will be owned and operated by a separate company; its board of directors will have a majority of independent directors. Each of the four partners will have an equity stake proportional to the amount of business it does through the exchange. Likewise, the auto exchange will become independent and will be spun off in what will undoubtedly be an enormously lucrative IPO. Such arrangements may help allay antitrust fears, but they raise other questions. For instance, what happens to the data collected by an independent exchange? "The question hasn't been answered," says Prouty.
Seeds Of A Revolution
There's no denying, however, that Web exchanges have the potential to transform how industries work. In March, privately held Cargill Inc., a Minneapolis-based distributor of food, agricultural, industrial, and financial products and services (1998 revenues: $51 billion), and software vendor Ariba Inc. announced plans to form Novopoint.com, an independent exchange for the food and beverage industry. (Cargill has a finger in several other exchange start-ups, including a meat-and- poultry marketplace, a bulk ocean-shipping exchange, and a farmers' E-market.) Novopoint.com's interim president, Tom Erdmann, thinks the venture can revolutionize supply-chain management in the industry--an enormous sector, doing business worth $300 billion a year in North America.
Slated to go live this summer, Novopoint.com will eventually offer a long list of functionality, including procurement for goods and services, auctions, reverse auctions, bid/ask exchanges, sourcing, spot buying, electronic payments, and logistics. Erdmann says the advent of Web communication fills a sore need in the food industry, in which EDI accounts for less than 10 percent of transactions. That's because of the number of added safety steps in the food chain: from farm to fork, "there are extra safeguards, extra documentation required," says Erdmann. The exchange will provide an XML-enabled means to transmit that documentation.
Novopoint.com could be the greatest thing since bleached flour. Erdmann says it will enable users to slash excess inventory, reduce demurrage (the price buyers or sellers pay for holding shipping vehicles too long), and optimize plant capacity. Web-transaction efficiencies will reduce the cost of the order-to-payment process by 70 percent, Erdmann reckons, by taking handoffs out of the system.
The typical food plant may use anywhere from 1,200 to 1,800 packaged ingredients in its product line; buyers know the market for the most heavily used 15 to 20 ingredients, but don't have the time or resources to shop for the rest. On the Web exchange, a purchasing manager could "go further down the list and do a better job of market and price discovery," says Erdmann. Markets previously stunted by lack of volume or geographic dispersion will bloom.
"Our business model serves buyers and sellers," sums up Erdmann. "We don't think a buyer- or seller- centric model is sustainable. We want win-win, not win-lose."
A Web trading exchange (also called a hub or portal) supplements the point-to-point communication model of telephone, fax, and electronic data interchange with the many-to-many model of the Internet. Passwords enable users to enter a virtual hub of buy- and sell-side activity, including catalog procurement, auctions, and reverse auctions.
But the exchanges being built by the large-company consortiums are intended to be more than mere marketplaces. They will create, in effect, supply webs, allowing trading partners to communicate and collaborate in real time, offering functionality from demand planning to release accounting to logistics. Many components are required to spin such webs.
Numerous vendors sell the core technology, but consultants cite a handful as the leaders in building large exchanges; they include Ariba, Commerce One, i2, Oracle, and Ventro (the latter for life- sciences hubs, such as Chemdex). Ideally, exchanges are formed before the selection of technology providers. The new auto exchange, however, doesn't have that luxury. Commerce One is GM's technology partner in TradeXchange; Oracle is Ford's in Auto-xchange. Both vendors are minority investors in the new exchange, which is in the process of making technology choices. Meanwhile, DaimlerChrysler, which doesn't have an exchange, brings enterprise- software vendor SAP to the party.
"We believe that Oracle is going to be the lead player in choosing components," says Kevin Prouty, senior analyst at AMR Research Inc., in Boston. "Oracle looks at Commerce One as a small add-on component." (An Oracle spokesperson wouldn't speculate on which components it expects to supply.)
Not surprisingly, Chuck Donchess, executive vice president and chief strategy officer for Commerce One, sees his company at the center of the action. Donchess says the Big Three exchange has already selected Commerce One's BuySite, an intranet-deployed app that can be described as an on-ramp for the hub. And for the Web site itself, Donchess says the exchange has chosen "elements" of Commerce One's MarketSite.
The process isn't political, insists Donchess. "The [new exchange] is making business decisions so it can be competitive. It's not just two technology companies coming up with some kludge." He concedes "there are some places where Oracle plays well, such as messaging and databases." The question remains, will Oracle play well with Commerce One--and with SAP?