Progressive Distributor - All about "e"

All about "e"

Do e-commerce and e-business represent a promise or peril to industrial distributors?

by Richard Vurva

The way to capture Wall Street’s attention today is clear: Put an “e” in front of or a dot-com behind the name of any business. The entire business community, including industrial distribution, seems to have gone Internet crazy.

The buzz at virtually every business gathering, including the upcoming ASMMA/I.D.A. spring convention, is about how electronic commerce and Internet procurement is changing traditional business models.

“There is a significant amount of hype in this market,” says Mike Skinner, a senior manager with Pembroke Consulting in Philadelphia. “The question remains, will the reality live up to the hype?”

Along with James Solodar, a senior analyst at Pembroke Consulting, Skinner will present “The Promise and Peril of On-Line Exchanges” on May 6, 2000 at the ASMMA/I.D.A. convention. They will explain the operating approaches of the most prevalent online exchange models and analyze competitive threats and opportunities the models pose to distributors and manufacturers.

There are essentially five distinct types of marketing exchanges, according to Skinner. They are 1) independent exchanges; 2) Internet-based supply chain networks; 3) portals or communities; 4) workflow marketplaces; and, 5) auctions and reverse auctions (see the sidebar below for an explanation).

The two types that appear to have the most momentum in the industrial distribution marketplace are independent exchanges and Internet-based supply chain networks.

Independent exchanges
Independent exchanges — online brokers or wholesalers operating within a given market — tend to be supply-driven solutions. They aggregate supplier catalogs on the Internet, enabling buyers of like products to source and purchase items from multiple suppliers in a single location.

Examples of independent exchanges making headway in the industrial distribution market are MilPro, the Internet marketplace for cutting tool supplies established by Milacron Inc., and IndustrialZones, an exchange where industrial buyers can source multiple products on a single purchase order.

Supply chain networks
Supply chain networks are primarily driven by large buyers or buying industries. The network is a place for buyers to execute business with existing suppliers via the Internet.

In a sense, the supply chain network enables large buyers to do self-directed integrated supply. They can manage high volumes of purchasing activities with multiple suppliers through a single, standardized point of integration. Examples of supply chain networks focusing on the industrial market are Commerce One, Ariba and MRO.com.

Why has the business world become so enamored with e-commerce? Because Internet technology makes it substantially easier for businesses to integrate their operations with their business partners. By doing so, they create significant supply chain efficiencies.

The investment community in particular has embraced the concept of utilizing the Internet to drive down supply chain costs. It has rewarded companies that are developing independent exchanges and supply chain networks with an influx of capital. Commerce One, for example, has a market capitalization of $18 billion and Ariba’s is nearly twice that size, at $31 billion.

In addition to attracting droves of investors, some of the exchanges are also inviting large distributors to join their networks. Often, distributors join more than one supply chain network.

“Many larger distributors are beginning to understand that in order to make a first move in this market space, they’re going to have to go online with a variety of online providers,” Skinner says.

MSC Direct, for example, has partnered with Ariba to provide its catalog on the Ariba business-to-business network and invested in another independent exchange, MaterialNet.com. Similarly, Fastenal has entered into partnerships with Datastream’s iProcure network and with EqualFooting.com.

“As each of the different online providers establishes relationships either with very large buyers or with buyer industries, they’re going to take with them — to the extent they can — whichever suppliers they have on board,” Skinner says.

Will large numbers of buyers shift their business to online environments? If they do, where will that leave the small to medium-sized distributor?

Although they should understand what is driving the Internet frenzy, they don’t need to be concerned that their traditional business model is in imminent peril, Skinner says.

“Distributors still have the corner on the market,” he says. “They own the customer at this point. Large influxes of capital from the equity markets are not going to change that overnight.”

He says small to medium-sized distributors are well-positioned to compete if they have developed long-term relationships with customers based on mutual trust, excellent service and a deep knowledge and understanding of their customers’ businesses and needs for the distributor’s products. Those elements of business-to-business relationships are difficult — if not impossible — to put online.

That’s not to suggest, however, that distributors should simply ignore what’s happening. Internet commerce will eventually make traditional relationships between distributors and customers more efficient.

“As distributors look at this market, they need to put a bit of a damper on the hype,” Skinner says. “They need to focus on the basics. Talk to their customers. Talk to their vendors and suppliers. Develop a better understanding of where these companies see themselves going in terms of e-commerce.”

His advice to distributors is to determine the needs of their customers and their supply chain partners before they act.

“The momentum appears to be more significant at the creation and investment level than at the user level,” he says. “There will have to be a significant amount of shakeout in the next 12 to 24 months in order to give time for the user community to catch up with the capital and investment going on.”

The five types of online exchanges

Independent exchanges are online brokers or wholesalers operating within one, or a defined set, of vertical markets. Examples in the MRO industry include MilPro, OnlineMRO and IndustrialZones.

These tend to be supply-driven solutions. In other words, they aggregate supplier catalogs on an Internet-based marketplace. Customers use Web browsers to log onto a Web site where they can source and purchase products from multiple suppliers.

Although these businesses are largely independent entities, many have formed partnerships with traditional companies in their industry to gain presence in the market and tap into existing product flows and customer relationships.

Sources of revenue for these exchanges include:

• Transaction fees charged primarily to sellers

• Web site advertising

• Consulting services to sellers centered on creating and managing electronic catalogs, as well as integrating the seller’s information management.

Internet-based supply chain networks are primarily driven by large buyers or buyer industries, such as the automobile industry. The Big Three auto manufacturers recently established a partnership with three software vendors to create an Internet-based purchasing network. The purpose is to further integrate the purchasing and inbound logistics operations of the automakers with their suppliers.

The network will host electronic catalogs from virtually all suppliers to the automobile industry. Each manufacturer can then execute its contractual relationships with each of its suppliers through a customized interface that is developed on a fully standardized technology platform. Another significant component of these solutions is that buyers are implementing intranet-based procurement applications that will help them manage and control their far-flung purchasing operations.

The most prevalent examples of these businesses are Commerce One, Ariba and MRO.com.

Commerce One initially targeted the MRO marketplace, but is now branching into OEM procurement.

To a large extent, supply chain networks are a kind of Internet-based integrated supply. Large buyers set up purchasing infrastructures to enable them to manage high volumes of purchasing activities with multiple suppliers through a single, standardized point of integration.

The majority of revenues for start-ups in this part of the market come from software licensing fees. In the long run, they expect and hope to claim the lion’s share of their revenues through transaction fees. They also earn revenues through consulting fees for Web site development, hosting services and fees for building catalogs.

The typical portal or community originated as a cross between an online trade publication and a real-time trade association. These Web sites provide industry news and feature articles, plus generic daily news and updates, like weather, sports and news headlines. They provide users with links to a variety of industry-related Web sites, so users can log on, research where they need to go to get what they are looking for and click through to a relevant site (hence the name portal). Some sites also support certain business processes, like requests for information (RFIs) and requests for quotes (RFQs).

VerticalNet is the most prominent company in this business, supporting portals in 53 industry verticals. Other examples include econline.com in electrical products and foodservicecentral.com in the food service industry.

At this point, revenues for these businesses come primarily from advertisements, but most portals are beginning to implement some form of commerce, facilitating transactions to purchase goods and services.

Additionally, VerticalNet and others are beginning to pursue partnerships and customers among traditional players in the industry, for whom they can develop and host Web-commerce solutions.

Workflow marketplaces facilitate large, complex, multi-party projects in, for example, the construction industry. They create and host online project management hubs that give individuals access to project-related documents such as blue prints and material requirements, plus project work plans. Users can log onto a project-specific Web page, obtain copies of documents, and view project status, upcoming activities and general work plan information.

Examples include Cephren, Bidcom and BuildNet.

Cephren is the product of a merger between a workflow marketplace, Blueline Online, and a construction equipment procurement exchange, eBricks.com. So Cephren now offers a project management solution as well as a vehicle for contractors to purchase project-related materials from distributors and manufacturers.

These sites also facilitate pre-project activity such as RFQs between builders, general contractors and subcontractors.

Auctions and reverse auctions are true to their name. They enable sellers to post goods for sale and buyers to post needs. Online auctions enable sellers to broaden the market of potential buyers and to put upward pressure on prices through competition among buyers. Reverse auctions enable buyers to broaden the market of potential suppliers and put downward pressure on price.

These sites have gained the most traction in markets for hard-to-move goods, such as used capital equipment, odd lots of commodities and surplus inventory.

Examples include TradeOut.com, ChemConnect, FreeMarkets and e-STEEL.

Source: Pembroke Consulting

Mike Skinner and James Solodar of Pembroke Consulting can be reached at 215-523-5700.