Managing Supplier Relationships

Lost in the confusion of public Net market battles, private Net markets will be the progenitor of future commerce chains. Companies should consider current buy-side investment as a private Net market foundation for supplier relationship management.

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Saving Private Net Markets. Lost in the confusion of public Net market battles, private Net markets will be the progenitor of future commerce chains. Companies should consider current buy-side investment as a private Net market foundation for supplier relationship management.

META Trend: The demand for custom products and services within evolving markets will drive supply chain collaboration--via portals, XML, SC tools, process automation, translation, inter-enterprise integration (IEI) tools, group-Web platforms, EDI, and so on--optimizing relationships and innovation cycles through electronic process integration across channel/partner relationship management, RFQ/bid management, new product introduction, product life-cycle management, and multichannel sales.

Our research indicates that Global 2000 companies and small, medium-sized enterprises (SMEs) are increasing their investments and dedicating more resources to both sell-side and buy-side e-business initiatives. Many companies are also considering how to participate within public Net markets (e.g., Ventro, VerticalNet, i2i , and so on) and whether they should enable their own private Net market to deal more effectively with suppliers and partners. Accordingly, vendor offerings are expanding to meet market demand, and the environment is getting crowded and confused.

Replacing Paper with Private Net Markets
Continuing this research, we believe that almost 35 percent of Global 2000 companies will have replaced their manual paper-based inter-enterprise business processes with private Net market technology by 2002/03, exceeding 65 percent by the year 2005, by which time private Net markets will have become the primary vehicles for managing supplier relationships. Beginning in 2002/03, the leaders and aggressors in their respective industries--that have deployed private Net markets among trusted suppliers--will use public Net markets to assist in seeking new partnerships that offer business or economic advantage.

However, we believe public Net markets will struggle through the year 2003. Our research indicates that many companies are currently participating in public Net markets as a vehicle to learn how the technologies and business models work. They are also trying to avoid being "blindsided" by unexpected market shifts in the event that they do not participate. While buyers within public Net markets are benefiting from reduced research time and lower prices, benefits to sellers are still unclear. Indeed, the risk of being reduced to commodity status is increasing. As a result, many public Net markets will either fail or be absorbed by successful ones. We believe successful public Net markets are likely to be driven by larger industry leaders (or, in a few rare exceptions, industry consortiums) that will demonstrate mutual benefits to both buyers and sellers. Furthermore, public Net markets in highly fragmented industries (e.g., agriculture/food, construction) have the greatest opportunity for success if skillfully led by dominant industry leaders: Cargill (agriculture), Grainger (industrials), Centex (home construction), JB Hunt (trucking), et al.

Yet skilled leadership in the public Net market domain is a rarity. While these and other high-profile initiatives offer great potential, we believe less than one-third will succeed, because they will poorly communicate their value proposition, having failed to formulate a "win-win" business model for both buyers and sellers. In addition, there is a buyer behavior lag. Many public Net markets have overestimated the rate at which buyers will modify their business processes and individual behaviors to use public Net markets. In many cases, buyers either are unaware of the value of the public Net market or simply do not trust it. Trust in public Net markets and its supplier/members must be gradually earned before buyers will begin to rely on them as a primary resource for procurement. Only then can transaction volume through these markets increase. Unfortunately, for many public Net markets, the time required to earn trust may exceed their capital burn rate.

Private Net markets, on the other hand, have an immediate opportunity for success. The vast majority of all transactions between a company and its suppliers are paper-based, manual processes. The fully loaded costs alone of these transactions can range from US$20 to US$150, not including the opportunity costs of the business cycle lag time associated with the inherent inefficiencies of paper/phone/fax-based communications. Companies can significantly benefit from emerging solutions that enable private Net market infrastructure (e.g., electronic order execution, credit verification, financing, logistics, settlement). Emerging exchange solutions from a range of vendors (e.g., EC Cubed , Atlas Commerce, Exterprise, The EC Company, IPNet Solutions, STC ) will be coupled with Net market vendors (Yantra, OrderTrust, Ariba, i2 Technologies, Commerce One, SAP, CommerceQuest, Electron Economy, Envera , et al.), thereby migrating obsolete inter-enterprise commerce processes into more efficient private Net markets. Beware of "Out-of-the-Box" Solutions
We caution, however, that many Net market vendors support primarily generic business processes (e.g., order execution, credit card verification). While these "out-of-the-box" processes may help some companies, they do not adequately serve others. For example, credit verification becomes far more complex when accepting payments other than credit or procurement cards (i.e., open purchase orders, electronic funds transfer, and so on). Indeed, credit verification among global trading partners requires a more complex solution to ensure worthiness in countries with weak economic, financial, and communications infrastructures. Logistics are also highly fragmented, both domestically and globally (for load planning, transportation management, booking, shipment load and confirmation, shipment merge and consolidation, track and trace, and so on). Few vendors offer complete logistical services, particularly in global trade.

Despite these shortcomings, private Net markets are the natural business evolution of many supply chain relationships. However, before companies begin to deploy private Net markets, we believe they must engage in a process mapping and modeling exercise to identify, map, and quantify their existing business and trading processes (e.g., events, time frames, resources, costs). The resulting process map should identify the "as built" metrics to scrutinize effectiveness and inefficiencies. From there, the company can design and test alternative electronic processes against the economics of the existing processes. This exercise will help identify the private Net market vendors that are most appropriate for a company's supply chain objectives.

Business Impact
Private Net markets are the natural evolution of inter-enterprise supply chain communications. They accelerate business cycles and lower the costs of typical commerce processes with a company's suppliers.

Bottom Line
Public Net markets will struggle as they build trust and value to both seller and buyer. Private Net markets, however, will be the next-generation commerce platform for most Global 2000 enterprises by the year 2005.

Electronic Business Strategies
Carl Lehmann
First published Aug. 15, 2000