Context

The emergence of the B2B exchange business model caught the business world
by storm in early 1999. Suddenly, the way companies transacted business was
becoming radically different, moving from traditional one-to-one paper-based
systems to the new network model powered by the Internet. The value proposition
in this new model was recognized as enormous. B2B’s panacea had arrived, and
everyone was a believer – including the capital markets.

The trillion-dollar B2B e-commerce projections of 1998 fueled a massive surge
of venture capital to the fledgling industry. Industry analysts AMR Research
and Gartner Group forecasted the value of B2B e-commerce in 2004 to be $5.7
trillion and $7 trillion, respectively. AMR said that by 2004, more than half
of B2B commerce will be transacted through exchanges. These mind-boggling numbers
inspired a speculative funding boom that led to the thousands of exchanges that
exist today.

But the climate has changed dramatically, and many of the start-ups are disappearing.
During 2000, capital pools virtually evaporated. With the slower-than-expected
adoption of trading exchanges for B2B commerce, capital markets became impatient.
The momentum of 1998 and 1999 was quickly foiled by the sell off in 2000. The
bubble had burst.

Why the slower-than-expected adoption of trading exchanges as the prime method
of transacting business between companies? Some say it’s because the early momentum
was ahead of its time – that big corporations were not ready to fully embrace
online trading. A better explanation, however, is this: there was a lack of
incentive for companies to embrace the online trading model. First generation
exchanges thought connecting buyer and seller and automating transactions was
enough. Clearly, companies expect more. B2B exchanges must do one fundamental
thing before they realize the large returns possible: they must make transacting
trade easier and better than how it is conducted today.

The focus for B2B exchanges in today’s capital environment is to achieve liquidity
in their exchanges. Next generation exchanges (the first generation exchanges
that survive) will be the ones that develop, acquire, or partner to offer the
value-added network services that will attract multiple trading partners and
intermediaries throughout the supply chain. While the first generation perfected
the procurement processes in making a deal for indirect materials, the second
generation will “close the loop” on the order cycle for direct materials, which
includes fulfilling online orders and instigating the payment process. That’s
where the next generation logistics exchanges can bring exceptional value.

Next Generation Logistics Exchanges

One of the first industry segments to embrace the online trading exchange model
was transportation and logistics. Logistics is inherently complex because of
the multitude of trading partners involved in Supply Chain Management. The concept
of a Web-based hub to act as a central information portal for the movement of
goods throughout the supply chain gained immediate support from carriers and
shippers alike.

First generation logistics exchanges essentially focused on the buying and
selling of logistics services like transportation, typically in a spot market
format. These first-generation exchanges tended to be horizontal, open markets
that let buyers post loads on a Web bulletin board, and let carriers bid on
those loads.

But a much greater opportunity exists in providing logistics exchange functionality
in a private hub (for example, for management of a manufacturer’s extended supply
chain) or an industry-specific consortium exchange. These private hubs and consortium
exchanges already have liquidity and existing relationships. The logistics exchange
functionality serves to help automate a process that today is highly manual
and inefficient. For example, automating the typical international shipment
can save $140 per order. This can add up to $3 billion in cost savings for ocean
moves alone.

There is a recognized need by vertical net markets to round out their value
proposition with additional functionality. By establishing close ties with vertical
exchanges and integrating seamlessly into their user interface (through punch
outs, or quick seamless links), logistics exchanges can extend their reach across
industries and geographies. With the right tools, they can leverage this reach
and aggregate loads across their system, translating into lower unit freight
costs and optimal volume management.

This is also a great opportunity for logistics and transportation companies
to establish virtual logistics services to increase their share of customer
spend. By deploying logistics exchange functionality to provide increased levels
of automation, visibility, aggregation and cost savings to customers, these
enterprises can turn the tables and use exchange technology to increase margins
rather than have it “commoditize” their services. Providing door-to-door services
for customers suddenly is possible for a much greater number of logistics service
providers.

More than 100 transportation-based logistics exchanges and hosted services
have launched since 1998. AMR Research predicts a consolidation in this field
and a reduction in the ranks of logistics exchanges during 2001 and 2002. The
time is now for exchanges to clearly differentiate themselves from the masses
and build critical liquidity.

B2B’s Holy Grail: Liquidity

First generation transportation and logistics exchanges have struggled to reach
liquidity, in other words to attract a critical and balanced mass of users.
The reason typically is an exchange’s unequal value proposition to the buyers
and sellers in the community, tipping the balance of power in one direction
– usually the buyer. It’s a classic economics issue, and like all economics
issues, it will be resolved by the market in time.

To illustrate a typical imbalance, take the vertical exchange example of Covisint,
the Big Three’s automotive exchange for the procurement of direct goods. In
2000, the OEMs consolidated their individual and proprietary exchanges into
Covisint, an attempt to streamline processes and leverage opportunities across
the global automotive supply chain. The problem in the eyes of Tier 1, 2, and
3 suppliers was the unspoken intent of the automakers to “auction” contracts
and drive down pricing, giving the OEMs the balance of power. What little existing
leverage suppliers had with the OEMs was being whittled even further in their
minds. (Today, Covisint has adopted a more collaborative approach with suppliers
to draw them into the community.)

A very similar scenario plays out within many transportation and logistics
exchanges, where the sellers of logistics services fear a “commoditization”
of their services. Why should they participate in an exchange where competitive
risk is only exasperated by the bidding for freight? To combat this imbalance,
next generation logistics marketplaces need to provide powerful and tangible
incentives for service providers to make them willing participants. Carriers
have not bought into the “soft” incentives like “access to a greater shipper
community”. Instead, they want tools that help them drive efficiencies throughout
their operations.

Exchanges need to give carriers incentives that are inherent to the collaborative
nature of online marketplaces: opportunities for volume aggregation, maximum
capacity utilization, and asset/fuel optimization. Carriers need to know that
there is tremendous value in offering their services through an exchange. Only
then will they migrate en masse to such a facility for transacting business.

What follows is a priority list for logistics exchange functionality that will
differentiate the next generation logistics exchange from the first generation.

Advanced Logistics Management Tools

First generation logistics exchanges were focused on providing an online facility
for matching loads between buyer and seller. While viewed as somewhat limited
today, this functionality was the critical first step in establishing the online
model as a viable one.

The first generation’s limited functionality was the primary reason for slow
adoption of online trading exchanges among large multinationals. For mid-market
companies – especially those who chose not to adopt EDI because of the expense
– finding carriers over the Web was in itself an incentive. What they got, in
essence, was a cheap and easy way to tender a load to a carrier for non-time-sensitive
freight movements.

But for those who had already embraced EDI, including many of the Fortune 500-type
multinationals that will drive B2B e-commerce adoption, there was little incentive.
In fact, some argue it made sense for them NOT to participate, because doing
so meant they where embracing a technology that essentially put their smaller
and less capitalized competitors on an equal competitive plane.

By focusing their initial value proposition on connectivity, the first generation
transportation exchanges had difficulty building a community. The key for second
generation transportation exchanges will be quickly developing and integrating
end-to-end logistics management functionality into their offering, like total
landed costs calculation and automated carrier selection.

A method for calculating the total landed cost (TLC) of goods moving across
borders has long eluded logistics departments. A significant first-mover advantage
exists for those logistics exchanges that quickly integrate today’s advanced
TLC tools. These applications enable buyers to understand the total procurement
costs by factoring in freight costs, tariffs and duties, taxes, insurance and
other financing charges. With this valuable information, they can make significantly
better buying decisions.

Another key area of functionality that will help define the winners and losers
in the second generation of transportation exchanges is automated carrier selection.
Applications that factor TLC calculations, a shipper’s existing service contracts
and carrier relationships are a key enabling technology for optimal logistics
management. Multi-variant carrier selection criteria (like cost, service level,
contract terms) are best applied across carrier communities like those established
in an online marketplace. Making these advanced logistics management tools available
in an online exchange environment is the incentive that will drive buyers of
transportation to participate.

Multi-Modal and Global Capabilities

According to a June 2000 Bear Stearns report entitled “egistics”, an examination
of e-business’s impact on the logistics market, almost three-quarters of freight
transportation exchanges offered services for a single mode only. Less than
10% claimed to handle freight transactions for all four modes.

While many shippers are increasingly mode-neutral, concerning themselves more
with the reliability of the service, it’s in the best interest of logistics
exchanges to develop a multi-modal network of service providers. Such a network
helps an online marketplace offer a wide range of logistics delivery options
at various prices and service levels. Additionally, shippers are more likely
to participate in exchanges that support all of their existing carriers across
all modes.

Perhaps the biggest imperative for multi-modality within next generation logistics
exchanges is their integration with multiple vertical exchanges, which tend
to have modal preferences. For example, a logistics exchange may act as the
fulfillment “punch out” for vertical exchanges in high-tech, consumer packaged
goods, and steel, which all have requirements for different modes.

Another driver of multi-modality is the next generation marketplace’s goal
to offer shippers total international logistics management services. Global
shipments are by their very nature multi-modal, and seamless transfer from one
mode to another requires connectivity and data exchange between parties in the
different modes.

This international nature of shipments will also require logistics exchanges
to encompass a global service provider base. Many first generation marketplaces
were regionally focused, or trade lane specific. As multiple modes converge
and regional exchanges expand, the numbers of buyers on these exchanges will
grow in kind.

Logistics Service Contract Management

The first wave of transportation exchanges were focused on the immediate obvious
opportunities to match spot demand with excess capacity in all the modes. The
Internet’s reach and ease of use gave shippers and carriers an optimal medium
for sharing information related to excess capacity and available loads. While
valuable, matching spot demand to unused capacity just scratches the surface
of logistics management. The vast majority of goods moving around the globe
do so under a service contract between buyer and seller of logistics services.
Up to 85% of freight moved by truck is done so under a long-term contract, and
more than 90% of ocean shipments are under contract. But the majority of logistics
don’t yet offer management of logistics exchanges under service contracts.

What’s needed in the next generation of logistics exchanges is the capability
to match loads to capacity considering all existing service contracts, preferred
carrier arrangements, and total landed costs calculations. This includes being
able to automate the contract negotiation process. By being able to manage goods
moving under contract, logistics exchanges can tap into a much larger market
than they are today in the spot market.

The Virtual Logistics Department

The race for functionality among logistics exchanges is furious because the
rewards are huge. Shippers have long sought a solution to all their supply chain
event management (SCEM) challenges. It is reasonable to expect that they will
now turn to private exchanges, consortium exchanges, and logistics service providers
to gain this SCEM functionality.

The 1990s saw in North America the widespread adoption of outsourced logistics
relationships with third-party logistics companies (3PLs) and dedicated contract
relationships for logistics. The 3PL industry has settled in to an annual growth
factor of close to 20%, despite some growing pains related to customer service
and performance management. The industry’s growth reflects the corporation’s
focus on core processes and competencies, a clear boon for outsourced suppliers.
It’s estimated that less than 5% of logistics expenditures worldwide are outsourced,
leaving a huge market opportunity for suppliers who can fulfill the outsourcing
of logistics management functions.

E-commerce only enhances this opportunity. Investment researcher Bear Stearns
forecasts the logistics market related to e-commerce to be $42 billion in 2000
on its way to $274 billion on 2004, with third-party outsourced expenditures
of $11 billion last year rising to $100 billion in 2004.

Next generation logistics exchanges are poised to get a large share of this
outsourced logistics pie. Logistics departments are not only looking to outsource
the majority of their logistics processes to one provider, they are also seeking
a one-stop shop for logistics applications. This highlights once again the importance
of building functionality for logistics exchanges in addition to establishing
a network of participants.

Shippers want a “virtual logistics department” in their logistics exchanges,
a complete suite of supply chain event management applications that allow them
to have end-to-end visibility throughout the supply chain. This includes integrated
products that enable more efficient management of the sourcing-to-distribution,
order-to-delivery, and order-to-cash cycles.

Next generation logistics exchanges must make available applications that
allow shippers and carriers to better manage each the following critical processes
in the supply chain:

Order decision-support

Shippers have a hard time understanding the total procurement cost of goods
and materials they source because freight costs, duties and tariffs, insurance
and other financing charges are often hidden or variable. Next generation logistics
exchanges will attract many new users by offering total landed cost calculations
that allow buyers to compare the impact of changing delivery mode, equipment
requirements, time of delivery, and carrier.

Inventory visibility

Buyers can make better buying decisions and carriers can make better delivery
decisions by having complete visibility to inventory in the supply chain. With
this information, companies can determine the most economical inventory source
to fill an order based on delivery and inventory costs, delivery date requirements
and other configurable business rules.

Shipment management

The collaborative nature of the online trading model is the foundation for
a host of shipment management tools that can be shared across the logistics
exchange’s user community. There is tremendous opportunity for shippers and
multiple carriers to: consolidate orders into loads for tendering; match loads
across service providers optimizing assets already deployed; and better manage
and measure relationships and contracts.

International trade logistics

The global reach of the second generation of logistics exchanges requires them
to offer management tools for the inherently complex importing/exporting documentation
process. To avoid the steep penalties now being instituted by customs regimes
across the globe, logistics exchanges can add significant value to their solution
set with tools for international trade compliance, and documentation management.

Fleet management

To bring additional value to carriers and private fleet operators involved
in the logistics exchange community, applications for optimization are key.
The open and secure flow of real-time logistics information among the user community
allows for optimization tools for dynamic routing, real-time dispatch, and wireless
application integration.

Aggregation and velocity acceleration

Merge in-transit, delayed allocation, multicompany freight consolidation and
deconsolidation, comingling of complimentary commodities and other logistics
techniques for increasing the order-to-delivery cycle and decreasing transportation
costs have long been subjects of discussion in logistics quarters. With second-generation
logistics functionality, these methods can be taken off the whiteboard and put
into action.

Financial management

The final and often overlooked step in the supply chain is making the transaction
final with proof of delivery and invoice generation. By integrating tools for
the automated execution of POD, audit, and final payment, logistics exchanges
allow shippers and carriers to manage the closure of the order cycle and accelerate
time to cash.

Conclusion

Clearly, the focus of the next generation of B2B exchanges in general, and
logistics exchanges in particular, is building additional functionality. While
the first generation exchanges tested the business model, the second generation
will take it to the next level, making the medium an essential platform for
global e-commerce.

By integrating the advanced tools and functionality discussed in this paper,
logistics exchanges can gain critical competitive differentiation in the following
areas:

• Liquidity: It is essential that logistics exchanges build functionality
  that attracts a balance of buyers and sellers of logistics services. Once
  attained, liquidity engenders a host of network effects across the user community
  and presents tremendous opportunity for economies of scope and scale.
• Customer Loyalty: Site “stickiness” describes how well exchanges
  retain existing users and get them to use their services more frequently.
  It’s built with effective tools that become a critical tool for users in carrying
  out day to day tasks. For logistics exchanges, these tools take the form of
  advanced applications that allow them to perform their jobs much more effectively.
• Leveraging Relationships: The new commercial imperative is the building
  of collaborative relationships. The horizontal nature of logistics exchanges
  enables a powerful leveraging of relationships across industries, with logistics
  exchanges playing the critical role of catalyst.
• Revenue Enhancement: By offering a new and broader suite of applications,
  logistics exchanges gain essential competitive differentiation and increase
  revenue stream potential.

2001 is a seminal year for the next genera-tion B2B exchange and logistics
exchange business model. The winners will emerge quickly from the throng and
carve a piece of the trillion-dollar opportunity associated with B2B e-commerce.