What Do E-marketplaces Offer Retailers?

The Internet has forced an increasing number of retailers to become e-tailers" or risk being left behind. However, as many of these companies have discovered, selling on the Internet is far more difficult than expected. As competition increases and the need to cut costs persists, retailers need to relook their buying processes. To meet this need quickly, retailers will look to centralized venues for purchasing--e-marketplaces or exchanges.

The power of the Internet has forced an increasing number of retailers to become "e-tailers" - to offer their goods online or risk being left behind. As many of these companies have discovered, selling on the Internet is far more difficult than you might think. E-commerce is much more than a flashy web site through which Joe Public can order groceries, CDs or sportswear from the comfort of his own armchair.

Retailers can derive the most benefit through business-to-business (B2B) trade online - the "supply" side of the trading equation. As opposed to business-to-consumer (B2C) trading, many Internet industry commentators are saying that the real money making and cost saving opportunities lie in B2B trading.

The most significant recent development in B2B e-commerce has been the establishment of "e-marketplaces". To make matters confusing, e-marketplaces are sometimes also referred to as electronic trading communities, online exchanges and B2B hubs. You've probably heard about e-marketplaces such as Cyberlynx, founded by a consortium of large corporations including Woolworths, Commonwealth Bank and Telecom New Zealand. This is an online buying "hub" for common goods and services like stationery, uniforms and travel.

While technology analysts are forecasting a consolidation in the number of online exchanges worldwide, predicting that many will not survive, they are forecasting that the actual volume of trade being put through e-marketplaces will increase dramatically - according to Forrester Research, 53% of all online business trade will be conducted via e-marketplaces by 2004.

What Is An E-Marketplace?

The Effect Of Exchanges On Price

Synchronising Supply Chains

A Three-Step Approach To Joining An E-Marketplace

Open Standards And Flexibility

What Is An E-Marketplace?

Retailers will need to address several business issues during the next five years - the ongoing need to cut costs, the competitive pressure to improve marketing, and consumers' adoption of new channels for research and shopping. These issues don't just affect the "sell" side of retail organizations. As retailers stretch their thinking into new lines of business, they will be confronted with the need to bring buying processes into the 21st century as well. To meet this need quickly, retailers will look to centralised venues for purchasing - e-marketplaces or exchanges.

Put simply, e-marketplaces are auction or exchange web sites where companies can trade goods and services. There are two types of e-marketplaces. The first is the private trading community, centred on a specific channel master, enabling customers, suppliers, logistics companies and manufacturers to share critical information about demand and inventory in a defined supply chain.

The second model is the hosted or public exchange. There are many different types depending on the complexity of the buying and selling relationships involved as well as the technology supporting them. They feature real-time access to buyers or suppliers.

Catering to a hunger for cost cutting, e-marketplaces provide an impressive list of potential savings. By joining these online trading communities, buyers can streamline procurement, access new market opportunities, share critical information with their trading partners and reduce transaction costs. Suppliers can increase revenue by expanding outside traditional channels and off-loading excess inventory. However, the greatest opportunity comes from unlocking previously inaccessible information across the entire supply chain.

In all the hype surrounding e-marketplaces, the real benefit to retailers has not been clearly communicated. While many retailers have joined because of the possibility of reducing transaction costs, it will not lead to a competitive gain. Retailers need to think more strategically to reduce inventory and to meet changes in customer demand.

The Effect Of Exchanges On Price

Exchanges are usually two-sided marketplaces where buyers and suppliers negotiate prices, usually with a bid and ask system, and where prices move both up and down. These work best with easily definable products without complicated attributes - commodities, perishable items such as food, or intangibles such as electric power.

Typically, exchanges allow qualified and registered users to look for buyers or sellers of goods and services. Depending on the approach, buyers or sellers may specify prices or invite bids, and transactions can be initiated and completed. Ongoing purchases may qualify customers for volume discounts or special offers.

Exchanges can produce fluctuating, and sometimes volatile, prices. This is particularly appropriate if a true market price is difficult to discover. It also works where brokers make high margins by buying low and selling high to purchasers who do not know the original sellers.

Examples of online exchanges include Paper Exchange (paper products), Foster's Brewing Group (wine and beer) and GoFish.com (frozen fish).

Synchronising Supply Chains

Some online exchanges also allow buyers to coordinate production schedules with their suppliers and squeeze excess inventory from inefficient supply chains.

In contrast to an exchange, a fully developed e-marketplace encompasses every element of the supply chain process, from buying and selling and transaction clearance to inventory visibility and logistics.

Synchronising the supply chains of trading community members leads to a significant increase in the visibility of total inventory at any point in time, regardless of location. By providing all parties to a trading community with full visibility of inventory and shipment, the expensive and wasteful result of the 'bullwhip effect' - cautionary "just-in-case" ordering that leads to magnified events along the supply chain - can be averted, and performance surprises will become a thing of the past.

A Three-Step Approach To Joining An E-Marketplace

For many retailers considering e-marketplaces, it is hard to know where to start. Especially when you don't understand how your organization can participate, and most importantly, what infrastructure is needed to support successful trading online.

To reap the full advantages of joining an e-marketplace, or develop a private community, organizations need to follow a three-step process. First, they need to maximise the value of information flow within their organization.

It doesn't always matter which financial or customer management solutions you select. The critical business decision is to provide an internal e-infrastructure, to seamlessly tie these different applications together, to share information efficiently and translate data into a format useful to all your internal systems.

Secondly, if an organization chooses an internal e-infrastructure tool, the same tool can be used to integrate and communicate externally with immediate trading partners, thus maximising the benefits of joining a trading community.

The final step depends on technology. If the e-marketplace uses a many-to-many, scalable e-infrastructure tool, collaboration with the trading community is straightforward. With the proper e-infrastructure in place, participants who can possess anything from a fax machine to a complex supply chain management solution can join a trading community with ease.

With a scalable, integrated infrastructure in place, retailers and their trading partners have the ability to introduce applications that produce real time events and monitoring as they happen - supply chain visibility.

Participants who already have their own e-infrastructure will not be dependent on the technology that the hosting company is based on. This greatly reduces the time and costs of joining a community.

Open Standards And Flexibility

The key attributes for trading community success include:

  1. The community's ability to handle many-to-many transactions, independent of the technology being used by members.

  2. The ability of the community to scale quickly. If the community cannot handle high volumes of real-time information exchange, it defeats the purpose of joining in the first place.

  3. Trading communities need to aim for a global marketplace and the host should be able to support customers globally.

  4. The functionality on top of the e-infrastructure should be geared towards visibility of the whole process and should enable end-to-end transaction, including delivery, from a single interface.

Companies may join more than one e-marketplace initially. If they develop a flexible e-infrastructure, they can co-exist with multiple e-marketplaces at any one time. Over time, communities that provide the most value will attract critical mass, making it very difficult for more than a few to exist in each sector. As elsewhere, early mover advantage is key.

In the long run, I believe that we will see a move away from current e-marketplace models towards a "value-added community" approach - a combination of marketplaces for different services, such as logistics, warehousing and customs clearance. A true e-business model is driven by customer choice, and as a result, the supply chain needs to be very flexible and nimble to meet their needs. Businesses will come together to meet a market need, which may be an ongoing relationship or even a one-time purchase. For the average organization, this community will include suppliers, partners, exchanges and customers.

To make such an undefined community efficient, companies need more than software from an e-commerce platform vendor such as Commerce One, Ariba or Oracle. They need to create value out of shared information and they need the agility offered by business integration and supply chain visibility technology to optimise a community of businesses.