VideoSmallish Ratner Steel Co. used to have trouble getting noticed by the $700 billion global steel industry. The Minneapolis-based company, with $12 million in annual revenues, processes steel coil into sheets for sale to fabricators and welders.
Because of its modest size, however, it was invisible to large coil suppliers like LTV Steel and Weirton. "We were not a priority [for them]," says Steven Gottlieb, Ratner vice president and CFO.
MetalSite.net changed that. The B2B (business-to-business) E- commerce trading hub introduced Ratner to 30 large steel suppliers in an online environment, where they negotiate deals from inquiry to settlement to shipment. "When we need a coil, we go online and bid on it," Gottlieb says. "LTV is now our second-largest supplier, when we didn't buy one ounce of their steel in the past."
MetalSite is one of an estimated 450 B2B E-commerce hubs that have sprung up like mushrooms on the World Wide Web in the past year. Already, B2B buying power dwarfs consumer purchasing on the Web by a 10-to-1 margin, according to Aberdeen Group, a Boston-based research firm. In Cambridge, Massachusetts, Forrester Research Inc. projects B2B E-commerce will skyrocket from $43 billion in 1998 to $1.3 trillion in 2003--accounting for 9.4 percent of all B2B sales in the United States.
The digital B2B marketplace promises convenience, transaction timeliness, and, depending on the model, a one- stop shopping experience. Many B2B hubs aggregate large amounts of diverse product information from a variety of vendors. By integrating the sourcing, purchasing, and billing for users, hubs dramatically reduce the cost of acquiring business goods and services. Companies can better manage capacity utilization, increase inventory turns, and optimize cash flow.
There's more. Many hubs also are a means to auction excess inventory and under-par materials. Small companies like Ratner Steel are introduced to a wider universe of both suppliers and buyers, while large sellers gain access to companies outside their regions and those seeking on-the-spot purchases. Meanwhile, price transparency and wider buying choices increase competition to prune the cost of goods. By comparison, traditional supply channels are clunky, costly, and chaotic.
Old Ways Die Hard
Yet, despite these advantages, many companies are still skeptical of vertical hubs. Large sellers turn their backs because they already have access to large buyers, and the hubs will only erode their prices. Others are apprehensive about agitating long-term buyer-seller relationships. And some simply turn up their noses because a hub is funded by a competitor (LTV, for example, is one of four major steel mill investors in MetalSite).
Even pioneering users of the vertical hubs, while bullish over their promise, are not about to ditch their traditional B2B methods of purchasing, procuring, and selling. "Our customers have come to rely on our independent manufacturing reps," says Pat Smith, vice president of marketing and sales at Maguire Products Inc., an Aston, Pennsylvania-based manufacturer of plastic processing equipment. "They have personal relationships. They know the names of each other's kids. Even though this intermediary channel is costly, it's not going away overnight."
Maguire Products has been plying B2B hub PlasticsNet.com for less than a year. It's generating some quotations through the hub, but so far, they add up to less than 10 percent of Maguire's sales, says Smith.
User discretion is a problem for vertical hubs seeking critical mass--that is, participation by as many sellers and buyers as possible. The ability to provide liquidity will separate the wheat from the chaff as the hubs undergo consolidation in the next two to five years, consultants predict. Many vertical industries are already saturated with B2B hubs. For example, e- Steel.com, MaterialNet.com, and MetalSite.net compete in the steel sector, while ChemConnect.com, Chemdex.com, and CheMatch.com vie for position in the chemicals sector.
To capture mass, many hubs are zealously raising capital to add value to their propositions. The jargon is to "go deep"--posting online industry news and information, job listings, and technical forums. Many sites also are partnering with vertical B2B software vendors, such as WebMethods B2B, Symix Systems, Tradex Technologies, and Computer Sciences Corp. (CSC), to integrate users' disparate supply-chain systems, so that buyers and sellers can communicate seamlessly with each other.
Some commodity and near- commodity hubs, such as ChemConnect, CheMatch, and e-Steel, are even laying the groundwork for organized derivatives markets, à la the Chicago Board of Trade. "As the spot market continues to grow, chemical companies will be able to sell forward contracts, which will help balance production and manage price exposure," says Larry McAfee, CFO of CheMatch.com.
Ultimately, the added bells and whistles, along with the obvious efficiencies promised by the B2B hubs, should win over the disinclined. "There are just too many cost-efficiencies to ignore," asserts Chris Silva, associate research analyst of Internet and E-commerce strategies at International Data Corp. (IDC), a Framingham, Massachusetts-based technology research and consulting firm. "Everyone knows this is the future of business-to- business transactions. Old ways die hard, but they do eventually die."
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