Private Exchanges Reinvent B2B

Private E-marketplaces may improve upon the model created by public B2B sites.
Jennifer CaplanApril 2, 2001

Two years after business-to-business marketplaces took the tech world by storm, the failure of many of these trading venues to live up to their hype has left many of their original boosters disillusioned.

So does that mean B2B is as dead as a dot-com? Not quite.

In fact, where public exchanges have faltered, private E-marketplaces, or those run by a single company, may fill the breach.

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AMR Research is already calling 2001 the year of the private trading exchange, and the market researcher projects that spending on related software and services will reach $35 billion by 2005.

A recent AMR report states, “The private trading exchange will steal the spotlight from the public and consortium exchanges that received most of the attention in 2000, becoming the corporate command center for B2B commerce. Every company will need to develop a PTX strategy if they do not already have one.”

So what exactly is a private exchange and what’s the hype about?

It is a Web-based trading forum implemented by a single company with a select group of suppliers and customers.

Matt Sanders, an analyst at Forrester Research, says the rise of private exchanges does not mean that the public exchange model is dead and buried. The notion that consortia and public exchanges have absolutely failed is premature, he says, since they have only been around for a short time.

In the meantime, however, Sanders contends that, private exchanges will become pervasive over the next three years, but he believes that the pendulum may eventually swing back to the public exchange.

“Private exchanges will provide a way for companies to formalize existing trade flows, which will eventually give them the understanding to be able to trade in more dynamic public environments,” Sanders comments.

But, you might ask, can’t enterprise resource planning (ERP) systems allow companies to automate transactions with suppliers and customers? To some degree yes, analysts say, but ERP systems tend to be predominantly inward facing whereas private exchanges connect the company to outside partners.

“A relatively small percentage of ERP installations are outward facing,” says Sanders. An ERP system, for instance, can only track a company’s own inventory at any given time, says AMR’s Fontanella.

“A private exchange [on the other hand] allows a company to track products that are currently in transit, and monitor what is on its suppliers’ shelves, or on its contract manufacturer’s shop floor,” says Fontanella. “This information allows a company to take inventory that it does not own or may not even be built yet, and make that available to the customer.”

In addition, there are certain activities that are generally not automated, such as sourcing and contracting with suppliers, that an ERP system cannot manage, says Dan Tiernan, President of Atlas Commerce, one of the earliest makers of private exchange software.

“Average companies don’t have a single system with all of their purchasing and supply information in it,” Tiernan adds. “They either don’t aggregate the information, or they do so manually. A private exchange provides an electronic way to aggregate how much a company needs to buy, define specifications, negotiate with suppliers, and establish a contract.”

What’s more, a private exchange gives suppliers an accurate picture of its customers’ needs, allowing it to reduce excess inventory. Likewise, if a manufacturer has real-time access to trends in product demand, production can be tailored to fit that demand more closely.

But unlike other B2B markets, private exchanges do not force companies to give up sensitive information to competitors or to suppliers that are also serving those competitors.

Another advantage of a private exchange is that it presents the enterprise as one to both customers and suppliers, allowing order aggregation and a better way to manage distribution channels says AMR’s Fontanella.

When a customer orders a variety of products from a company with multiple product lines, it is more than likely that that customer will have to submit multiple orders, and will receive different shipments and invoices. Similarly, when a supplier sells to different divisions of a company, it will usually receive separate purchase orders.

“There’s no aggregation of the buying,” says Fontanella. The private trading exchange can aggregate transactions for both customers and suppliers, he says, thus saving time and resources.

A private exchange also allows companies to better manage their distribution channels.

For example, if a customer wants to buy a Cisco router, he goes into the private exchange that Cisco has built, configures the product according to his needs, and then checks for price and availability. Cisco manages the product configuration and the distributor provides pricing and availability, but the customer has obtained information on the exchange without knowing whether he is dealing with the manufacturer or the distributor.

At this point, private exchange technology is still predominantly browser based. Fontanella says, “We are still in the very early stages of this.”

Although aggressive companies are using a private exchange to integrate the entire value chain from design to final sale, most are starting off more modestly by implementing E-procurement as the first phase. “It’s really being done in modules,” Fontanella says.

Most of the private exchanges to date have been implemented by large companies such as Dell Computer, Wal-Mart, and Hewlett-Packard, that are focused on managing their supply chains to gain a competitive advantage, and have a high degree of influence over their suppliers, says Tiernan.

“Leading companies have created their own private exchanges because they realize that their competitive advantage is determined not just by how well they operated inside their own business, but how well they are able to make their products with the help of their suppliers,” he adds.

So what’s in store for private exchanges? Can they deliver on their promises? Or will they follow the disappointing pattern set by their public-exchange B2B predecessors?

Sanders says to forget the disappointment pervading the broader tech industry, especially the public B2B marketplaces. Private exchanges are here to stay. It’s only a matter of time before they prove their worth.