After much fanfare, online marketplaces grapple over an uncertain role in traditional distribution channels.

by Richard Vurva

The bloom has faded from the rose. Just a few short months after opening their doors with great flourish and fanfare, online marketplaces are shutting down, laying off employees or restructuring their business plans. Many online marketplaces (OLMs) — once touted as the new way for buyers to purchase MRO products — have either abandoned the idea of a public marketplace or relegated it to a lesser role.

For example, MROLink, formerly IndustrialAmerica.com, is now focusing on developing print catalogs and custom onsite catalogs for distributors. Excara, which recently changed its name from PurchasingCenter.com, closed its marketplace in mid-December and will devote its energies toward helping manufacturers digitize content for Internet use. And supplyFORCE, the online marketplace that members of Affiliated Distributors hoped would gain them entry into the world of e-commerce, now plans to focus exclusively on the national contract side of the business.

What caused this sudden change in direction? Why, in a span of less than 12 months, did companies surrender their plans to assemble marketplaces for one-stop shopping?

In large part, OLMs failed to accurately gauge the readiness of the end-user customer to buy online.

Results of a new study of Fortune 500 companies shows less than one-third of these businesses order strategic goods from online suppliers and many have no idea how well their electronic procurement systems perform. The majority of companies responding to the study did not know the actual number of purchases they made from online suppliers, according to the study by the Hurwitz Group, a Boston-based consulting and research company.

One reason buyers aren’t doing more transactions through marketplaces is because they don’t want to stop dealing with their traditional suppliers.

“The trends are pointing away from public marketplaces where unlimited buyers and suppliers connect to each other, searching for the best deal and analyzing offerings of multiple suppliers,” says Bill Eisele, an analyst with the Hurwitz Group. Instead, the trend is moving toward building private marketplaces between customers and existing suppliers.

“Buyers want to connect to the same suppliers they were dealing with before,” he says. “Suppliers want to keep up with the changing times and stay connected to buyers they’re already working with. At this point, companies on both sides are comfortable simply automating the transactions they were already doing. They’re not looking to reach a whole new spectrum of business partners.”

Not dead, just delayed
Just because OLMs have failed to catch on in the industrial community doesn’t mean the concept of electronic procurement is doomed. More likely, the timing is wrong.

Bob Segal of Frank Lynn & Associates says there are four reasons online marketplaces haven’t succeeded. No. 1, there are too many of them. Each OLM is scrambling to build an identity, causing confusion in the marketplace. No. 2, sources of capital have dried up. This is true not just for OLMs, but for most dot-com start-ups. No. 3, and perhaps most important, the OLMs have done a bad job of explaining their short-term return-on-investment value proposition.

“Virtually none of the marketplaces made a compelling argument that says we’re going to charge you 2 to 3 percent to process transactions, but we’re going to reduce your costs by double or triple that,” he says.

The fourth problem OLMs face is a lack of data standards. There are no common standards for describing product attributes. It cost the OLMs much more of their venture capital to create product databases than they thought it would.

Where’s the pain?
Why aren’t customers and their existing suppliers migrating more quickly to the Internet? For most buyers, it’s still easier to do business the old-fashioned way. When they want to make a spot buy, they pick up the phone or check a catalog. It’s even simpler for customers to make repetitive purchases. Thanks to the popularity of distributor bin-stocking programs on the manufacturing plant floor, end-user customers rarely place their own orders.

“Small-dollar repetitive items are in free issue. Distributors order that stuff for the customer,” says Doug Ruggles, president of Martin Plant Services, the integrated supply division of Martin Supply Company. “Many customers don’t have to do anything to order those items. Will they use e-commerce? No. They have no cost to procure this stuff today.”

Who will move first?
Most distributors expect their large customers will be the first to make the move to online procurement. But Ruggles says Internet ordering won’t catch on even with large customers until it is tied into the enterprise resource planning systems those companies utilize.

“When that becomes seamless, that’s when e-commerce will take off,” he says. “But it will take longer to get there than what most people think.”

Two things prevent most distributors from embracing e-procurement. The first is money.

“For us to get the benefits of the Web, we have to change our software,” says one distributor. “Unless we’re ready to make that investment, we’re not going to be e-commerce ready. A software conversion is not only expensive, it’s a hassle.”

Distributors investing in e-commerce capabilities today are placing bets on a horse that not only hasn’t left the gate, it’s still in the stable.

“In most cases, distributors understand they’re not buying immediate results. They’re buying the ability to offer better customer service to their current clients who are beginning more and more to request e-commerce capabilities,” says Albert Cassola, director of marketing for Thomas Regional. “They’re also buying some piece of mind because by being proactive and choosing to engage in e-commerce, they’re positioning their business to remain strong.”

A second stumbling block for distributors is a fear of losing their identity. On the Internet, all distributors look alike.

“Online catalogs don’t do justice to their products,” says Eisele.

Small and mid-sized distributors struggle with how to differentiate themselves on the Web. It’s difficult to translate unique service offerings to an automated catalog environment. Until marketplaces give sellers a good chance to differentiate themselves, at an affordable price, distributors aren’t likely to sign on with them in large numbers.

Despite the failures of some online marketplaces, Segal says the concept is still sound.

“Rome wasn’t built in a day,” he says. “It looks messy right now. Many, if not most of them, will be out of business. But the alternatives look even worse. The concept is good, it’s just going to take a little while to get there."