This paper was written for PurchasePro, an early B2B e-commerce company in early 2001. It is a good example of an explanatory white paper aimed at non-technical business executives.
At the time, B2B marketplaces were a new and growing phenomenon. The goal of this paper was to introduce the concept of B2B marketplaces to sourcing executives who were just beginning to see the potential of managing their supply chains over the Internet.
If someone offered you a solution that could give you instant access to a wide audience of interested prospects, increase the efficiency of your purchasing function, automate and streamline your buying and selling processes, and reduce your sales and purchasing overhead, would you be interested?
Bet yet, suppose you can get this solution for little up-front investment of time and money, virtually no hardware or software outlays, and without having to rely on your IT resources or outside consultants. Sound too good to be true?
It isn't. The reason lies in the Internet. It is indisputable that the Internet is a viable and growing channel for businesses to conduct commerce, both as buyers and sellers. What's more, the Internet has leveled the playing field for businesses of all sizes and circumstances, giving them equal opportunity to pitch and source products and services to a worldwide audience for a negligible cost of entry. Who wouldn't tap into a channel that offers so many possibilities for such a reasonable investment?
If you think you can ignore the Internet as a platform for conducting commerce, think again. As a seller, consider these statistics. Forrester Research predicts that in a very short time -- by 2002 -- roughly 70% of buyers and sellers will use B2B marketplaces to engage in commerce. Even more mind-boggling, AMR Research expects that by 2004, $3 trillion in B2B sales will flow through marketplaces. This $3 trillion figure does not represent additional sales but a redirection of existing sales to B2B marketplaces. Sellers, take heed. That's $3 trillion moving to marketplaces and out of traditional sales channels. If you join a marketplace, you not only get to protect your market share, you have the chance to capture sales from the laggards.
As a buyer, note these numbers. AMR Research estimates that the average company spends more than 80% of its revenues buying direct and indirect goods. Any efficiencies introduced into the buying process obviously go straight to the bottom line. Analyst firms Giga and IDC project that B2B marketplaces will allow companies to shave from $180 to $480 billion off transaction costs by 2003. Buyers that fail to use marketplaces won't share in this bounty. Businesses that do will see their margins rise.
This paper introduces perhaps the most compelling B2B commerce option available today -- B2B marketplaces. B2B marketplaces are intuitively appealing because they can give companies exactly those benefits described above -- wider audiences, higher revenues and margins, increased efficiency and reduced costs. The remainder of this paper shows why B2B marketplaces are fundamentally transforming commercial activities today.
If you want to conduct commerce over the Internet, where do you start? There are several options. Before the Internet, companies had to make trade-offs when selecting channels for buying and selling goods. There was no single, efficient, cost-effective way to market products to, or source products from, a global community of interested buyers and sellers. Today, there is thanks to the Internet.
A combination of high adoption rates, standard communication protocols and relatively inexpensive connections, make the Internet the ideal platform for inter-company transactions. Companies can generate leads, convert online interactions into revenue-producing relationships, reduce sales and purchasing overhead, compete more aggressively and grow their market share. And all of these activities can be done 24 hours a day, 7 days a week, around the world, for minimal up-front investment.
There are basically four ways that companies use the Internet to engage in commerce.
Simple web sites promote product and brand awareness, but present mainly static information -- marketing literature or catalogs. These sites lack built-in commerce capabilities and therefore can produce only indirect financial benefits. They often have a hard time attracting enough visitors or generating qualified sales leads. Buyers have to perform their own research to find these sites.
Many second or third-generation web sites have order-taking capabilities. These storefronts have the potential to generate direct financial benefits, but without a high flow of visitors, the benefits won't materialize. The burden is on prospective purchasers to find these sites, and most are consumer-oriented rather than business-oriented.
From extranets to virtual private networks, companies adopt supply chain applications to strengthen their ties with buyers and suppliers. These point solutions permit one-to-one commercial transactions with existing partners, but are not designed to market products, widen an audience or generate new sources of revenue.
B2B marketplaces are business-oriented platforms where buyers and sellers can meet to transact business. They are geared specifically to create and support wide communities of interested purchasers and suppliers. Requiring little implementation effort or investment, they allow buyers and sellers to reduce their purchasing and sales overhead and increase their efficiency. Sellers can also capture more sales and increase their revenues.
For most companies, the fastest way to get real benefits from the Internet is to participate in a B2B marketplace and tap into an instant community of interested buyers and sellers. Marketplaces offer the most complete set of benefits to buyers and sellers, come in several different types and incorporate rich features designed to accomplish simple to complex transactions. This section of the paper explains the concept of a B2B marketplace, examines its benefits, reviews the basic types available today and summarizes the key must-have features.
B2B marketplaces are online destinations where multiple buyers and multiple sellers can engage in commercial transactions. A member of a marketplace can participate as a buyer, a seller or both. Members research selling and buying opportunities, offer and purchase products and services, and take advantage of related, value-added services.
Figure 1: B2B Marketplace Model
There are three primary players in a B2B marketplace: buyer, seller and market maker. A single company can participate as a buyer and a seller. For example, an electronic parts company can use the marketplace to sell electronic components and buy office supplies from another member. The market maker is the sponsor of the marketplace and performs the necessary administrative functions from operating the marketplace to supplying the infrastructure, registering members and servicing and supporting them.
How does a B2B marketplace work? Buyers and sellers register as members and connect to the marketplace via the Internet. Buyers must decide who will be allowed to transact business through the marketplace-- the purchasing department or end users. Using marketplace tools, buyers set up authorizations, approvals, spending limits, access rights and other purchasing policies for each user. They also identify preferred or contract suppliers that are connected to the marketplace.
A seller's initial task is to create an electronic description of its products and/or services, typically in the form of a catalog. Marketplaces generally provide tools to create, maintain and even import catalogs. Like buyers, sellers will identify preferred or contract buyers and their associated terms (discounts, volume purchases, etc.).
After these basic set-up steps, buyers and sellers are ready to use the marketplace. Buyers can research items, view promotions and browse catalogs. They can request quotes and ask suppliers to bid competitively for their business. Purchase orders can be issued through the marketplace and matched with receipted goods. Sellers can advertise product sales, update catalogs, auction inventory, engage in price negotiations with buyers, make offers and accept purchase orders. Both buyers and sellers can use marketplace reporting and tracking capabilities to generate audit trails, analyze the performance of counter-parties, and evaluate buying and selling patterns.
B2B marketplaces offer significant benefits to all participants. The actual benefits received depend on how heavily a company takes advantage of the marketplace, and whether a company participates as a buyer and a seller. For example, a company that funnels all of its purchases through a marketplace will realize greater cost savings than a company that makes only sporadic purchases. Looked at from each player's perspective, B2B marketplaces offer these benefits.
B2B marketplaces present sellers with several attractive financial benefits from improved liquidity to better forecasting.
Buyers benefit from B2B marketplaces by increasing their efficiency and saving costs.
Marketplaces are grouped along two axes, as illustrated below. They can be private or public, horizontally focused or vertically focused. Large market makers will typically sponsor marketplaces in all four categories, and can offer participants of one marketplace the best of all worlds -- seamless access to other types of hosted marketplaces through marketplace-to-marketplace interactions. In this way, a member of a private veterinary supplies marketplace can, for example, access the global marketplace hosted by its market maker to source commodity goods like paper and light bulbs. When selecting a marketplace, buyers and suppliers should consider the breadth of marketplaces offered by the market maker, and its ability and willingness to foster marketplace-to-marketplace interaction.
Figure 2: Types of B2B Marketplaces
Marketplaces are either open to the public or private. In a private marketplace, the market maker decides who gets to join. Private marketplaces restrict membership to preserve some affinity around a particular product or service or an industry. Public marketplaces include AOL's NetBusiness, Honeywell's myFacilities.com, iTravel's travel marketplace and PurchasePro's Global Marketplace. Private marketplaces include [PurchasePro: is this correct? Sprint (open only to users of Sprint's long distance service)], Page Co-op (open only to newspapers and printing facilities that are members of the cooperative), and CoVisint (open only to auto suppliers).
Marketplaces can have a horizontal or vertical focus. Horizontal marketplaces sell a diverse collection of goods or services. For example, America Online's NetBusiness allows sellers to market an unlimited range of products and services. Vertically focused marketplaces are formed around a particular product or service, a given industry, the needs of a large supplier or buyer, or some other interest group. For example, Vetbuyersnet.com is a marketplace focused on the buying and selling of veterinary supplies. Funeral Exchange is a B2B marketplace catering to funeral products and services.
B2B marketplaces have a full range of features. Some features are necessary -- every marketplace must have sufficient security to ensure the integrity and privacy of data exchanged over it. Other features, like dynamic pricing and catalog management, will vary among marketplaces. A good marketplace will have the following capabilities.
Marketplaces also offer a host of value-added services ranging from reporting and audit capabilities, wireless support, settlement, chat rooms and news feeds.
It's easy to get involved in B2B commerce -- just join a marketplace. By taking some simple preparations and devoting a little energy to choosing the right marketplace and the right market maker, you can be up and running in no time.
While some companies may choose to build their own marketplace from scratch, most will find it unnecessary. Building a marketplace takes energy, commitment and an active outreach program to enlist buyers and/or sellers. Most companies find that an existing marketplace with an established and growing community can best serve their needs.
Joining a marketplace is a straightforward task. Sellers and buyers must prepare, but preparations are minimal. The market maker is responsible for the bulk of the more time-consuming administrative and operational tasks.
From a seller's perspective, preparations include:
From a buyer's perspective, preparations include:
With so many marketplaces, companies must take a little time to choose the right one. Sometimes the choice will be obvious -- the marketplace where most of your buyers and suppliers are found is a good match. In general, however, companies should consider the following attributes when selecting a marketplace.
Decide whether a public or private marketplace is the better forum, and whether a broad or narrow focus is more appropriate. Public marketplaces are good choices for sellers and buyers interested in ordinary, non-production goods and services. Private marketplaces may offer sellers access to more targeted buyers, and buyers access to sellers with specialized goods. Vertically focused marketplaces may be best for specialty products or services, raw materials of industry-specific goods. Horizontal marketplaces may offer the largest community of sellers and buyers and the greatest cross-section of goods. A veterinary supplier, for example, would prefer a vertical marketplace targeted at the veterinary industry over a horizontal marketplace aimed at indirect goods. But a manufacturer of office cubicles might lean towards a horizontal marketplace with a office furniture and equipment category. Finally, marketplaces that can interact with other marketplaces are ideal because they combine the advantages of several different types of marketplaces.
The marketplace must have attributes that encourage usage and permit transactions to complete successfully. Key characteristics for success include:
Joining an existing marketplace is usually not an expensive proposition. Today, most marketplaces charge reasonable membership fees that may even be waived in some cases. Nevertheless, members must be able to justify any initial and recurring costs, including internal labor costs, to join a marketplace. Tools or services, like authorization management and catalog management tools, offered by the market maker can help defray set-up costs. Once a company is actively using the marketplace, it may decide to make additional investments in integrating its back-office systems with the marketplace.
The party sponsoring the marketplace can make or break it. It is important to consider the qualities of the market maker to evaluate the chances of success for your marketplace. As more B2B marketplace providers emerge, it is critical that companies perform their own diligence to assess the long-term viability of their selected marketplace. Essential characteristics for a market maker include:
A strong grasp of B2B commerce from a business and technical perspective translates into cutting edge solutions for your marketplace.
A market maker with a history of prosperous engagements and satisfied customers is likely to repeat its successes and perform well in the future.
A market maker with a winning business model will be financially successful and able to weather market fluctuations.
The marketplaces sponsored by the market maker should have, or be on a path to attain, a critical mass of participants. Low participation is one of the foremost obstacles to marketplace success.
Since marketplaces must grow to succeed, the market maker should have a scalable operational model able to support the needs of its marketplaces.
Reaching critical mass is a criterion for marketplace success. A market maker should have plans to grow its membership base and actively support its members in their efforts to enlist additional participants.
The larger the marketplace, the more each party gains. A market maker that has access to and can connect diverse marketplaces gives participants the opportunity to reach a wide audience without sacrificing their membership in more specialized marketplaces.
Market makers that provide responsive and proactive customer service resolve issues quickly, disperse needed information in a timely manner and ensure the success of each member in using the marketplace.
To extract the full benefits of a marketplace, members should look for a market maker that offers value-added services such as industry news, chat rooms, wireless capabilities and more.
A market maker with ties to multiple marketplaces, other market makers and technology companies can use those relationships to offer additional services to its members.
From all accounts, B2B commerce is starting to explode. It's easy to understand why. B2B marketplaces offer instance access to a wide and interested audience, increased efficiency in purchasing and sales, streamlined buying and selling processes, reduced overhead and enhanced revenues. The benefits are high and the initial investment is low. And, if you pick the right marketplace and market maker, it's simple to get started.
As you look around, you'll find increasing numbers of your customers, suppliers, partners and competitors trading through B2B marketplaces. They will receive their share of the $ 3 trillion in projected sales. They will benefit from the up to $480 billion in projected efficiency savings. Shouldn't your company be among them? It can be. All you have to do is be in the right place -- as a member of a B2B marketplace!
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