PDF File: 

ASC3_wp_temkin.pdf

Forrester Research

As the e-marketplace landscape settles out, firms must prepare for a new, heavily collaborative, environment.

Over the past year, e-marketplaces like CheMatch and Covisint grabbed the B2B spotlight. What's all the hoopla? Online markets propose to more efficiently link buyers and sellers, enticing many purchasing execs to shift their procurement into these venues (see Figure 1). Given this huge potential, a plethora of new market-makers have popped up across just about every industry. With the all of these options, brick-and-mortar corporations wrestle with selecting the right strategies as they face:

Multiple ownership models

Buyers and sellers aren't just choosing between different types of e-marketplaces - they must also discriminate between different equity structures as well. A company like TRW, for example, faces a bewildering range of options: participate in an operating e-marketplace like PartsBase.com, join an industry consortium like MyAircraft, or invest in the seemingly endless flow of ventures like TradeAir.com.

Free-for-all dealmaking.

In their rush to build momentum, e-marketplaces craft a host of messy deals. This flurry of activity leaves participants like 3M wondering whether they're better off demanding exclusivity for a product category or settling for a seat on the board.

Disparate product offerings.

Participants fret about choosing between e-marketplaces offering a few select items and those peddling a wide array of products and processes. Ashland, for example, must weigh trading at Covalex, which focuses on six commodity chemicals, against ELEMICA, which aims to be a one-stop shop for everything from resins to paper clips.

Tangled technology.

The current applications landscape is cluttered - ranging from homegrown code at markets like RetailExchange.com to off-the-shelf platforms from the likes of Commerce One and Ariba. As a result, buyers and sellers worry they'll waste valuable resources integrating with an e-marketplace whose technology might soon become obsolete.

Figure 1 - Buyers aggressively expand their marketplace activities
(See Larger Image)

Consolidation Storms Across E-Marketplaces

Today's confusion won't last. As companies increase their use of e-marketplaces, participants discover what they want - and steer business away from venues that don't meet their needs. In addition, the flow of venture capital has slowed down to match the realization that every B2B dotcom won't necessarily garner astronomic market caps. The result? A shakeout that will roll out in three waves (see Figure 2):

The Purge (2000-2001) - A slew of dot-coms will wither away over the next 12 months as their venture-funded bank accounts run dry.

Fortification (2001-2002) - As industry consortia get rolling, e-marketplaces will survive by learning how to deliver results to picky participants.

Reconciliation (2002-2003) - Once e-marketplace trade hits critical mass, marketmakers will carve up the territory and play discrete roles.

Figure 2 - E-marketplaces will go through a three-phase shakeout.
(See Larger Image)

The Purge (2000-2001)

E-marketplaces are in an all-out race to build a sustainable volume of buyers and sellers. But they're struggling to sign up participants fast enough to satisfy today's more demanding capital markets. Over the next 12 months, many dot-coms will sputter and die as they:

• Overcrowd slow-moving industries. E-marketplace launches outpace user adoption in e-commerce-straggler supply chains like construction, consumer goods, and food. As a result, there won't be enough volume for e-marketplaces like BidBuyBuild, market4retail.com, and Foodtrader.com to muster momentum.
• Confront industry consortia. The rise of Fortune 1,000-led groups will strangle many startups. Big metal buyers like Kaiser are committing to consortia like MetalSpectrum, squashing independent metal sites like CMXchange. Other casualties to consortia will include aviationX, e-Chemicals, and Farms.com.
• Choke from bad business models. Although B2B hype shielded many e-marketplace ideas from deep scrutiny, low trading volumes and smart competition will skewer future funding. Who's at risk? E-marketplaces premised on arbitraging information between buyers and sellers like the National Transportation Exchange and fobchemicals.com.
• Morph their mission statements. With the consolidation writing on the wall, first-movers like Ventro and Commerx have remade themselves into software providers. But most attempts by companies like OneChem and Avolo to reposition themselves as ASPs will fail because they lack the technology foundation and marketing muscle to make the switch.

Fortification (2001-2002)

By the middle of 2001, leading industry consortia will begin conducting meaningful levels of online business. At the same time, increasingly savvy buyers and sellers will no longer settle for empty promises - they'll demand capabilities. What happens next?

• Independents will join forces. To expand functionality and achieve liquidity, surviving dot-coms with public currency like VerticalNet will go shopping - paying deep-discount prices for industry expertise from marketplaces like Band-X and XSAg.com. And, pushed by funders to defend themselves against consortium efforts, arch competitors like PaperExchange.com and PaperDeals.com, as well as CheMatch.com and ChemConnect, will combine to reach critical mass.
• One-sided markets will seek neutrality. E-marketplaces that don't offer a level playing field will struggle to attract participants. Buyer-driven e-marketplaces like the Global Healthcare Exchange will invite sellers to help craft information sharing rules, and clubby ventures like Rooster.com and PetroCosm will offer equity to include both industry and external players.
• Grandiose visions will be pared back. Faced with sharp competition, e-marketplaces will give up on all-encompassing reinvention plans, focusing instead on a few areas. Covisint, for instance, will spin off MRO from its supply chain efforts, while Industry To Industry will shed all but a few of its 16 verticals.
• Stymied consortia will surrender. Members of mega-syndicates will get stuck in lengthy negotiations over issues like product strategy and technology. With all of the partners primed for trading, many participants will flock to other venues that are up and running. ForestExpress members like Weyerhaeuser will throw in the towel on endless debates and join fibermarket.com.

Reconciliation (2002-2003)

Forrester previously forecasted that e-marketplace trade would hit hyper-growth in 2002. At that point, e-marketplace mystique will fade and rational business practices will set in. With user adoption taking off, surviving e-marketplaces will have more to do and less need to fight over small bits of turf - drawing the lines of truce as:

• Alliances form - E-marketplaces will figure out that survival now requires taking on complementary roles rather than head-to-head battles. Industry players may know how to wring out supply chain inefficiencies, but independent e-marketplaces will be better at providing the market access and neutrality required for spot markets. Based on this new realization, consortia- sponsored e-marketplaces like OMNEXUS.com will partner with third-party ventures like PlasticsNet.com to offer users a full range of options.
• Real P&Ls emerge - Marketmakers will drop their exclusive reliance on subscription and transaction fees, instead mapping their fees to the value they deliver to buyers and sellers. QuestLink Technology, for example, which enables design engineers to reduce product development time, will craft service fees that are proportional to users' productivity gains.
• Participants tie in - In order to capture the full benefits of online trade, smart buyers and sellers will integrate with just a handful of e-marketplaces. After committing to XML-based processes and data standards championed by marketmakers, users will give up on playing the field - and make the best out of their connected markets.
• Functionality soars - E-marketplaces will move beyond basic services like credit and logistics - incorporating complex components like supplier performance monitors from Open Ratings and data analysis tools from ExpertCommerce. In this environment, e-marketplace startups touting PowerPoint slides alone will struggle to even get their phone calls returned by corporate execs.

The e-Marketplace Landscape Circa 2003

As the dust from the shakeout settles, Forrester believes that four unique e-marketplace models - each with a distinct value proposition, business model, and market structure - will emerge (see Figure 3):

• Procurement malls - A small handful of e-marketplaces will take on the role of hosting the catalogs of multiple indirect materials vendors - offering e-procurement services to all industries. Procurement malls will make money on transactions - leveraging their large scale to charge minimal fees.
• Commodity marts - A few cross-industry e-marketplaces will provide ready access to specific raw materials like electricity and chemicals. Commodity traders will expect these venues to be independently owned and controlled in order to ensure anonymity and to guarantee equal access.
• Industrial facilitators - Several e-marketplaces will tie transactions into critical workflow processes for indirect materials like machine pumps and lab supplies. In addition to transaction fees, industrial facilitators will make money on a pay-per-use basis for services like maintenance management and real-time credit.
• Vertical hubs - A wide variety of e-marketplaces will attack narrow direct materials product segments. Basic transactional matching will remain critical in fragmented sectors, but Vertical Hubs' primary value will come from enabling supply chain efficiencies like lower inventory and better capacity utilization.

Figure 3- Four types of e-marketplaces will emerge by 2003.
(See Larger Image)

Charting the Rise of Vertical Hubs

Buyers have high hopes for using the e-marketplaces to streamline their flow of direct materials. What's driving this enthusiasm? The opportunity to improve coordination and collaboration with suppliers. Rather than continuing with today's inefficient communication patterns, the Net lets manufacturers instantly share information with their entire supply chain - enabling purchasers to:

Eliminate inefficiencies

Demand forecasts are typically communicated from tier to tier up the supply chain - introducing substantial delays and inaccuracies along the way. But the Internet allows manufacturers to instantly share up-to-the-minute production needs with all tiers of suppliers. Rather than filtering requirements through Rockwell Collins, for example, Cessna Aircraft can communicate manufacturing schedules directly to National Semiconductor.

Slash inventory

Today, suppliers maintain substantial product inventory to buffer inaccurate or out-of-date forecasts. With the Intenet, vendors can get real-time access to end-customer demand. Honeywell, for instance, should be able to bypass automotive systems suppliers like Delphi and Johnson Controls to directly access GM's production plans. The result: up-to-date demand forecasts that would drive down excess inventory and material shortages.

Optimize production capacity

Today, buyers regularly change production schedules with little regard to supplier constraints - often forcing vendors to run plants at overtime rates or liquidate excess inventory at fire-sale prices. With better links into supply chain capacity, manufacturers can work with suppliers to reduce overtime costs and reduce inventory buildup. When Apple learns that a supplier has excess blue monitors, for example, the computer maker can quickly shift its keyboard production to blue.

E-Marketplaces Offer a Shared Infrastructure

Making the decision to collaborate with captive suppliers is easy. But what about syncing up with other players in the industry? E-marketplaces provide a venue for entire supply chains to cooperate. Rather than building a proprietary infrastructure, manufacturers expect these shared collaboration environments to:

• Reduce supplier integration costs - Manufacturer-centric hubs force suppliers into a frenzy of integration efforts - as each buyer insists on satisfying its unique set of interface specifications. An industry-wide venue, on the other hand, allows firms to integrate to multiple customers through a single e-marketplace, substantially cutting down on the slew of integration projects. Using Elemica, for example, Shell can connect to both DuPont and BASF with a single link.
• Minimize investment expense - Rather than creating redundant systems and capabilities, e-marketplaces allow firms to share the development and ongoing maintenance costs. That's why Compaq and HP jointly created the High-Tech Exchange - to avoid development of their own private hubs.
• Optimize industry-wide capacity - By pulling together supply chain information from many firms, e-marketplaces can offer a consolidated picture of industry capacity and market demand. The result? Companies will find new ways to optimize inter-enterprise production. e-STEEL, for example, might allow Ford and Caterpillar to coordinate similar steel orders through Bethlehem Steel mills, reducing changeover costs, and increasing mill use.

But Industry-Wide Coordination Will Take Time

While e-marketplaces can offer compelling benefits, their collaboration offerings won't materialize overnight. What's the snag? Satisfying the needs of all firms in an industry takes more than just issuing a few press releases. Many efforts by marketmakers to build these supply chain-wide sites will get bogged down in:

• Standards conflicts - To coordinate multiparty supply chain activity effectively, e-marketplaces must forge industry-wide information and business process standards. But these standards won't come easily as competing manufacturers fiercely defend long-held business practices. DaimlerChrysler and GM, for example, will struggle to agree on production forecast formats, let alone a common process for sharing and refining that information with suppliers.
• Privacy fears - To improve direct materials efforts, companies must share sensitive data like engineering information, demand forecasts, and production schedules. But as our interviews demonstrate, companies remain concerned about letting their confidential information flow through these venues. National Semiconductor, for instance, is not likely to share production schedules until the electronics firm is sure that competitors won't have access to the data.
• Competitive concerns - Many firms capture significant advantage through their supply chain activities. These companies won't give up their own efforts to share processes within e-marketplaces. Why should they level the playing field? Seeing only the downside, supply chain leaders like Dell and Wal-Mart will continue to resist participating in industry-wide venues.

Firms Take On Different Collaboration Profiles

Manufacturers won't just sit around and wait for e-marketplaces to live up to their potential. Since buyers already thirst for substantial benefits from their Net initiatives, firms will move ahead on their own. The result: surges of both public Vertical Hubs and private supply chain efforts. But companies won't all follow the same path. Forrester believes that firms will adopt one of four collaboration personas (see Figure 4):

• Isolationists just do it themselves - Isolationists won't wait for industry-wide e-marketplaces to take hold. With limited reason to share standards or infrastructure and little to be gained from working with peers, companies like Volkswagen and Boeing will focus on their own supply chains.
• Associators look to simplify integration - Associators, like tier-one auto suppliers Eaton and Denso International, don't have enough market clout to push suppliers into their private hubs. They also have little to gain from sharing demand forecasts and supplier capacity constraints with competitors.
• Cooperators build inter-enterprise solidarity - A few firms will look to leverage their shared supplier base and standardized product inputs. Companies like PC manufacturers HP and Gateway will push for industry-wide Vertical Hubs to deliver benefits that they could not achieve in isolation.
• Dualists hedge their public bets - Some firms, like Lucent and Ford, will see substantial benefits from reining in their own supply chains as well as from pushing for industry-wide collaboration.

Figure 4-Supply chain hubs provide significant opportunities.
(See Larger Image)

Crafting The Right Vertical Hub

Because firms possess different collaboration profiles, they aren't likely to share a single vision for an industry-wide e-marketplace. Forrester believes that this diversity will fuel the creation of two genres of Vertical Hubs (see Figure 5).

Figure 5- Public versus proprietary supply chain hubs.
(See Larger Image)

Consortia must take an honest look at themselves in order to decide whether they should develop (see Figure 6):

• Communication facilitators - Lacking well-defined business processes and industry-wide product standards, many Vertical Hubs will provide just the basic infrastructure for linking companies together. How? By establishing XML-based standards and aggregating data across participants. Manufacturers and suppliers that connect into these hubs will pay for services through an ASP-like model of subscription fees along with à la carte payments for additional services.
• Industry optimizers - Some e-marketplaces will actively coordinate entire supply chains. These full-featured sites will monitor cross-enterprise demand and capacity to fulfill manufacturers' needs with optimal supplier capacity. Participants will directly own and manage these venues and support them primarily through membership and service fees.

Figure 6 - Firms will take on different collaboration personas
(See Larger Image)
.

Getting Ready for the E-Marketplace Evolution

As the e-marketplace landscape settles out, firms must prepare for a new environment.

Sellers should plug into supplier clearinghouses.

To lower the risk of connecting into soon-to-be-defunct venues, sellers should use emerging integration brokers. Firms should let these intermediaries do the heavy lifting of plugging into multiple e-marketplaces. This strategy will provide companies with the flexibility to more easily connect into - and pull out of - online markets. Sellers like Parker Hannifin should hire Clarus to handle its catalog content management, while buyers like Cargill can employ services from Viacore for document formatting and routing.

Firms should profile their partners' collaboration profile.

Rather than blindly waiting for their customers to define industry-wide collaboration, suppliers will often need to develop their own plans. How should they start? By evaluating the collaboration index of industry consortia efforts. Once component vendors like Fairchild determine that vertical hubs formed by aerospace OEMs like Boeing and Lockheed Martin won't get much done, these vendors should step up their own direct materials initiatives.

Buyers must go beyond XML standards.

XML standards alone won't solve the integration challenge for businesses. To prepare for connecting into vertical hubs, companies must first understand their internal processes. How? By mapping their workflow for events like requisitions routing or the "break bulk" points of the supply chain. This understanding will help firms tackle the difficult task of plugging into online markets that will eventually streamline industry practices.

Consortia must shed non-production procurement.

Running a successful procurement mall will require both the scale and independence to aggregate the myriad required vendor catalogs. Attempts to build this capability would fully consume the agendas at industry consortia meetings, Instead of getting bogged-down in this activity, Exostar and Covisint should outsource their indirect materials procurement to firms like works.com - and