By the end of 2000, several of these independent exchanges, including Industrial Vortex, an industrial parts marketplace; Chemdex and Promedix, life- sciences and medical products exchanges run by Ventro; and RedLadder.com, a construction marketplace, had announced cutbacks or gone belly up. The shakedown left room only for gargantuan consortium-run exchanges such as Covisint (an auto industry exchange backed by GM, DaimlerChrysler, and Ford) and smaller public exchanges that have found a niche market or a creative way of generating revenue that does not tax the supplier or the buyer.
Still, online marketplaces are a smart bet. But the real opportunity lies in private, not public, exchanges. Medium to large companies are building their own private marketplaces, not to capitalise on yet another Internet gold rush but to cut costs and streamline business processes by moving their entire supply chain online.
Whereas public exchanges are essentially open marketplaces that must first attract buyers and sellers then generate revenue from advertising, transaction fees, or some unique offering such as a vast database or a parts-finding service; private exchanges take a company's existing group of suppliers and distributors and put them online. For example, when Amtrak created its private exchange, it moved key railway parts suppliers online to facilitate transactions including passenger and express business cars.
The numbers attest to the growing presence (and influence) of private marketplaces: Approximately 30,000 private exchanges are currently in development, compared with some 600 public exchanges now in operation, according to the GartnerGroup. And in 2000, 93 percent of B2B e-commerce was transacted through such private exchanges, according to a study by eMarketer. Companies such as Dell Computer and Wal-Mart have also moved their supply chains online, and many more are following suit. In fact 54 percent of companies surveyed were already purchasing online by mid-2000, and 87 percent of those who didn't were planning to purchase online within one year, according to Goldman Sachs.
Most likely, your company's first foray into rolling out an e-business plan consisted of setting up an e-procurement or customer relationship management system. The next step may be to join one or more established public trade exchanges like VerticalNet or Covisint as a means of buying and selling goods and services at reduced prices, with better exposure and greater convenience.
But if you're satisfied with your key suppliers and distributors, and the volume of business you do warrants making a significant investment in process improvements, then it may be time to set up a private trade exchange.
The benefits speak for themselves. "Private exchanges take a naturally occurring community of buyers and sellers and put them on the Web. This lowers transaction costs, provides better information up and down the supply chain (which makes for better inventory management), and allows for collaboration around new product design or market intelligence," says Randy Covill, senior analyst for retail practice at AMR Research. When a company has many small suppliers, streamlining the transaction and communications processes saves money for the company, its suppliers, and ultimately the customer. Brian Hodgson, director of product management for SupplyWorks, a company that builds exchanges for industrial manufacturing concerns, estimates that customers will save from 5 percent to 10 percent depending on the number of suppliers.
The electronic exchange system is not a new idea. Companies have been doing business with each other via proprietary electronic data interchange (EDI) systems for years. But these private networks for data transfers between companies tend to be costly and complicated, and the supplier (often a small company making a low profit margin) has usually had to bear the brunt of transaction costs. Web exchanges, however, provide a relatively inexpensive platform and a familiar interface.
