Smallish 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.”
It Takes A Virtual Village
“Every day I get a call from another dot-com company starting up an online auction site or exchange,” says Emily Andren, a senior analyst for B2B E-commerce at Gartner Group Inc., the Stamford, Connecticut-based IT advisory firm. “There’s big ones and little ones, from sites for reconditioned computers to telecom bandwidth–everything under the sun. Some replace the intermediary channel with their little black books sourcing buyers and sellers. Others are a way to sell overstocked merchandise or distressed goods. And a few verticals, like PlasticsNet, want to do it all.”
Although the concept may smack of futurism, vertical B2B E- commerce hubs are really a throwback to millennia-old trading bazaars. A hub is simply a virtual village in which companies mingle with other buyers and sellers in one place, circumventing the need to create point-to-point connections. As the Phoenicians learned, why carry a basket of grain from door to door (the equivalent of faxing or phoning today) when you can meet all the buyers at the town square?
Most B2B sites are geared to a specific vertical industry, such as all the suppliers and buyers that come together to assemble what eventually becomes a car. But not all B2B verticals are alike. There are two distinct models, with various permutations thereof.
One is the auction model. It takes its cue from Ebay and other similar sites, where sellers put up items for sale and buyers bid on them. The other is the exchange model, in which a hub collects bids from product suppliers and submits those to buyers. In essence, the exchange acts in a neutral capacity, setting the ground rules for buyers and sellers, who gather at the site and pay a fee for each transaction conducted. These fees make for a respectable E-business model; a study by the Kellogg Graduate School of Management at Northwestern University estimates B2B hubs could generate transaction fees exceeding $10 billion within three years.
Romac Electronics Inc. finished its first auction in late November on MaterialNet.com, a hub beta-launched in October for buyers and sellers of raw materials. “We were the buyer in a reverse-auction setting, submitting our need for an oddly shaped piece of nickel-iron alloy to make a particular component for a customer,” says Lee Bloomberg, vice president and CFO of Romac, a privately held, Plainview, New Yorkbased precision machining and stamping company.
Traditionally, Romac’s purchasing manager would open the hefty Thomas Register, a 12-volume encyclopedia of companies, products, and services, to scan lists of potential suppliers. Appropriate sources would be faxed an RFQ (request for quote) and would reply in kind. Romac’s fax machines uncurled rolls of fax paper round the clock. “With MaterialNet, we put in what we want, how we want it, and when we need it–one time,” Bloomberg says. “Everyone sees it.”
Bloomberg is tight-lipped when it comes to revealing how much was saved using the hub, concerned the revelation could affect long-term supplier relationships. “Dollar-wise, it was a very small amount,” Bloomberg says. “Of course, if you multiply that savings by the volume of transactions we do here, it would add up to a healthy amount. As for now, though, we expect to use the site only for spot purchases, where a customer for whom we usually make 100,000 components needs a couple hundred pretty fast.”
At the other end of MaterialNet are manufacturers wanting to unload surplus inventory at prices better than what they would normally receive from liquidation brokers (the value is derived by the aggregation of so many buyers in one place). “We’re using the site to reach hundreds if not thousands of buyers who never heard of us,” says Richard Pierce, CFO of Pierce Aluminum Co., a Canton, Massachusetts-based wholesale distributor of aluminum products to the transportation and aerospace industries, with $50 million in 1999 revenues.
“We’re a service center,” explains Pierce. “We buy from the mills and depot aluminum on our floor for just-in-time delivery to customers. That’s our value added. We have extruded shapes ready to ship out at a moment’s notice, cut to the customer’s specifications.” Pierce Aluminum went online in November with MaterialNet. “We’re bullish on the site as another brokerage channel,” Pierce says.
ChemConnect.com offers what auction sites essentially provide, but via an exchange model. “We allow buyers and sellers to come together without having to go through a gigantic Rolodex,” says John Beasly, CEO of the six-month-old San Franciscobased hub, which specializes in the trading of bulk chemicals. “We link companies to other companies they never did business with before.”
ChemConnect helped Eastman Chemical Co. identify new customers internationally. “We’ve now got several valuable commercial relationships going forward with companies that didn’t have a mechanism for reaching us before,” says Chris Dagenhart, E-procurement systems manager at Eastman, a Kingsport, Tennessee- based seller of chemicals, fibers, and plastics, with $4.5 billion in 1999 revenues.
James Rogers, Eastman’s senior vice president and CFO, touts the hub’s transactional efficiency and consequent cost savings. “But what really gets me excited is what this will mean five years down the road,” Rogers adds. “Research in the chemical industry indicates that 10 to 20 percent of the commercial chemical market will go through media like ChemConnect. When you multiply the number of transactions that will occur times the dollars saved in transactional efficiency, it adds up to significant numbers.”
By getting on board early, Rogers believes Eastman will get a jump on its competitors. “Here’s a channel of distribution growing at a three- digit percent rate, versus customary channels growing in the low single digits,” he explains. “If you increase your share of business in the fast-growing channel, you will leapfrog your competition.”
Paper And Plastic
Many vertical industries, such as the paper business, are beset by supply-chain fragmentation. “In the printing and writing grades within the paper industry domestically, there are some 50,000 printers, and in the containerboard market, there are more than 3,000 converters,” says Jason Weiss, CEO of PaperExchange.com, in Boston. “The seller base also is fragmented.” Weiss says none of the eight major segments of the paper industry has “an oligarchy on the buyer’s side, where four or five companies control 90 percent of the market.”
A paper exchange can assemble all these links into a seamless supply chain, aggregating innumerable companies and, using database technology, giving users the ability to browse, search, and rationally define and organize thousands of different offers much more quickly than a broker using a telephone or fax. Productivity improves dramatically. “We’re putting out inventories [on PaperExchange.com] that we traditionally had a tough time selling, like odd sizes or lesser-quality paper,” says the CFO of a major paper manufacturer. “I just put out what we’ve got once, and thousands of potential buyers see it.”
PaperExchange.com charges buyers nothing and sellers a 3 percent transaction fee, “a far cry from the 3 to 12 percent commissions charged by intermediaries,” Weiss says.
Other hub users extol their potential to disintermediate costly brokering channels. “We typically pay our independent manufacturing representatives a 12 percent commission,” says Maguire Products’s Smith. “Yet, all they really do is find the buyer [plastics processors] and use their knowledge of our equipment to solve that buyer’s needs. We have to do everything else–take the purchase order, handle credit collections, invoicing, and so on. And it’s not like they represent just us; they represent other manufacturers, too.”
PlasticsNet.com assumes all the sales busywork for Maguire Products, and has the domain expertise to boot, notes Steve Maguire, the company’s CEO. “They take complete responsibility for credit and collections with the end user, eliminating the need for us to run credit checks,” he says. “We don’t have to chase past-due invoices. Our productivity is enhanced due to streamlined, start-to-finish transactions.”
More than just plastic is featured on Plastics- Net.com, a vertical aggregator that’s closer to a Home Depot than to a lumberyard. “We offer anything and everything a plastics buyer needs, from the usual additives, resins, and pulverizers to desks, chairs, and fax paper,” reports Tim Stojka, co-founder (with his brother, Nick) and CEO of Chicago-based Commerx Inc., the hub’s owner.
Launched in 1995 as a bulletin board for buyers and sellers in the plastics industry, PlasticsNet.com became a full- fledged marketplace in early 1999. The hub is a hybrid of a traditional vertical servicing a particular industry and a horizontal hub like OrderZone.com or MarketSite.net, which sells a wide range of products to diverse vertical industries. PlasticsNet boasts some 150 suppliers selling 6,000 different products to more than 30,000 registered buyers.
Stojka thinks other exchanges are missing the point by not providing single-point solutions to procure everything needed up and down the supply chain. “If you’re a buyer, you don’t want to jump from one site to buy steel, to another to buy pens, to another to buy paper,” he says.
Users compare the hub to a shopping-cart experience. “We’re buying resins, and we plan to expand to capital equipment and standard MRO [maintenance, repair, and operating] items,” says Mark Di Lillo, president and CEO of Endura Plastics Inc., a Willoughby, Ohio-based custom injection molder servicing the auto and electronics industries, with $10 million in 1999 sales. “We’ve been using it for seven months, and it already represents 20 percent of our procurement needs.” Endura CFO James Walsh adds that using the exchange provides both cost savings and simplified transaction processing.
Stojka says Commerx will launch another industrial B2B hub this year, but he’s mum on the particular vertical. He predicts other trading hubs like e- Steel and ChemConnect will eventually plug into his system. Then, if a buyer wants to see what’s going on in a steel auction, “he just clicks it on,” says Stojka.
Too much of a good thing?
Although Web hubs seem destined to play ever-greater roles in the B2B economy, many are guaranteed to vanish, consultants say. “The biggest problem right now is that they’re proliferating,” says Varda Lief, senior analyst at Forrester Research. “There’s a gazillion of them. Venture capitalists are funding anyone with a business plan who can breathe.”
Having too many hubs simply reintroduces supply-chain fragmentation–the very reason why hubs were developed in the first place. “For this to be useful, there has to be a few dominant hubs in each vertical,” Lief says. “Therefore, there has to be consolidation.” She predicts a violent shakeout in the market in two years.
While PlasticsNet.com, for instance, has both the critical mass and domain expertise (the founders hail from a family- owned plastics supply company) to dominate its market, other hubs are still finding their way. Building know-how and liquidity will separate the winners from the losers as the hubs gobble each other up, consultants say. “Without buyers you can’t get sellers, and without sellers you can’t get buyers,” says IDC’s Silva. “A user wants to know who the big names are at the other end. Nobody wants to be the first adopter–the bleeding edge.”
Hubs launched too late, or too early without enough “name” companies, may not be able to achieve critical mass for liquidity. “MaterialNet’s success really depends on how good they do with advertising and the scope of customers they bring in,” says CFO Pierce of the hub. “I’d be pleased if it brought us $100,000 of extra business a year, but I don’t know if that’s in the cards.”
Liquidity is one issue; neutrality is another. MetalSite, for example, has achieved mindshare by locking in major industry traders, but its ownership by four major steel mills is a problem for some users. MetalSite CEO Patrick Stewart is adamant about the hub’s neutrality. “This is an unbiased marketplace,” he insists. “Besides, all the major B2B hubs are selling equity interests to their respective industry participants, including Chemdex, PaperExchange, and Plastics-Net. That doesn’t mean we’re not independent. Investors are investors. We have our own board and management team.”
To attract critical mass, hubs are avidly raising capital to expand their menu of services. Money is coming from private sources, B2B venture-capital firms like Internet Capital Group, and IPOs (Freemarkets OnLine was in the thick of one at press time).
The top spending priority for many hubs is software linking users’ diverse procurement and purchasing systems. Virtually all sites are promising back-end supply-chain software integration capabilities, giving sellers and buyers the ability to check production, planning, order, and shipment status with their entire range of partners, despite differences in respective systems. E-Steel, for example, has partnerships with ERP vendor Symix and CSC to enable both buyers and sellers throughout the value chain to easily initiate transactions. PlasticsNet has a similar partnership with Atlanta-based CommerceQuest.
Such software is the “glue linking participants up and down the supply and service chains,” says Stan Lepeak, vice president at Meta Group, a Stamford, Connecticut-based consultancy. “Rather than hardwire multiple organizations across one another, companies can plug into hubs that create these linkages between them.” But it won’t be easy or cheap for the hubs to implement and maintain the enabling software, adds Lepeak.
Eventually, hub efficiencies will become automatic. “We’ll offer a world in which computers order from computers,” predicts David Centner, president of MaterialNet.com. “If your inventory is about to drop or you have a customer in need of supply, our system will anticipate and accommodate it.”
Russ Banham is a contributing editor of CFO.
Let’s Go to the Mall
It’s the giant mall of B2B (business-to-business) E-commerce, an amalgamation of 53 vertical hubs with such arcane URLs as adhesivesandsealants.com and meatandpoultryonline.com. Horsham, Pennsylvania-based Ver ticalNet uses an industrial-communities model to lure business visitors to its cybermeeting places, where recondite materials from pinch valves to polymers are hawked and bought.
Part trade magazine, part bulletin board, VerticalNet’s hubs offer industry news, job listings, chat rooms, virtual trade shows, supplier and buyer information, and Ebay-like auctions. “We’re the America OnLine of high-speed business-to-business exchanges,” boasts Mark Walsh, CEO of VerticalNet Inc.
One user is Brooks Instrument, a Hatfield, Pennsylvania- based company specializing in instruments for the pharmaceuticals and chemical- processing industries. “We log on to chemicalonline.com to get a listing of legitimate suppliers and buyers,” says Mary Beth DiEleonora, marketing communications manager. “We exchange E-mails and RFQs, then go offline to do business the traditional way.” Brooks pays $7,500 a year for a “storefront” on three VerticalNet sites–money that is well spent, DiEleonora adds. “We’re not getting ‘tire kickers’ like you usually get through trade magazine bingo cards,” she says. “VerticalNet prequalifies everyone who uses its sites. The inquiries we get are legitimate.”
Many users build storefronts on several VerticalNet sites, because their products have diverse application. ABB Asea Boveri, for example, sells pumps on the food, chemical, and water-processing sites. To help users branch out into related sites, VerticalNet has grouped its hubs into 10 subcategories. In the environmental section, for example, one finds wateronline.com, pollutiononline.com, solidwaste.com, poweronline.com, and publicworks.com.
To build mass, VerticalNet buys both existing “verts,” like safetyonline.com and propertyandcasualty.com, or starts them from scratch. While he projects VerticalNet will grow or buy another 5 or 10 sites in the next year, Walsh says it eventually will consolidate to about 40 or 50 sites maximum. “We’re going to sunset a few,” he says.
As he positions VerticalNet to become the AOL of B2B exchanges, Walsh is quick to tout the site’s user-customization features. “You want FedEx? You can link to it from me,” he says. “You like to read first thing in the morning how the Red Sox did? You got it. And we’ll follow it up with a recent OSHA law important to your business. Basically, we want to be one of the operating systems for the virtual economy.”
Getting there has required wading in some red ink. VerticalNet’s third-quarter 1999 revenues were $5.18 million against a cash loss of $10.13 million. “This is all about buying market share,” Walsh explains. “Five years from now, if we looked back and we hadn’t spent, you’d call us stupid.” R.B.
Auto Czars Launch Bazaars
On the same day last November, giant automakers General Motors Corp. and Ford Motor Co. announced they would move their purchasing operations to the Internet, via business-to-business exchanges, by the first quarter of this year. Each company buys more than $80 billion worth of materials and components annually, from tens of thousands of suppliers. By putting their supply chains on the Web, the automakers expect to save billions through lower prices and transaction efficiencies.
The auto exchanges will also be a boon for two software vendors. General Motors is teaming up with Commerce One Inc., a Walnut Creek, California- based maker of procurement software, to create its virtual marketplace, called TradeXchange. (An information site for TradeXchange can be found at w ww.gmsupplypower.com.) Meanwhile, Ford has formed a joint venture with Redwood Shores, California-based Oracle Corp. to bring its hub, AutoXchange, on line. Oracle has predicted that AutoXchange will enable Ford to slash its purchasing costs by as much as 20 percent.
Both Ford and General Motors will encourage their suppliers to use the exchanges for their own purchases, as well as for expanding their customer bases and selling surplus inventory. The automakers “can pass on the benefits of economies of scale to other members of the exchange,” notes Chris Silva, associate research analyst of Internet and E-commerce strategies at International Data Corp., in Framingham, Massachusetts. At the same time, the automakers will be in a position to reap many millions from the exchanges in the form of transaction fees and advertising revenue.