This Year’s Model

While independent exchanges are stalling, industry-led trading hubs are gaining in popularity. Here's what we found when we examined E-marketplaces in four industries: metal, chemicals, paper, and energy.

The vertical-marketplace model seemed so simple. Pick any multibillion-dollar industry. Insert your Web site between the buyers and suppliers. Skim a small fee off each transaction they conduct. Retire to a life of truffles and witty conversation.

Unfortunately, the plan had one small hitch. Cash was required to get these independent exchanges up and running. With the Internet economy unexpectedly hitting the skids in 2000, many builders of vertical-market exchanges ran out of capital before they could establish themselves. Moreover, by midyear, buyers and providers started getting into the exchange game, determined not to let upstart middlemen take over their carefully built supply-chain relationships.

“By coming out visibly and with so much hype, the independents really put fear in the heart of the old economy,” notes Leif Eriksen, research director of chemical and process industries for AMR Research. “But at the same time, they invited the old economy to come take a look.”

The old economy did more than look. It came, it saw, it conquered. “If 2000 was the year of the independent exchange,” says Eriksen, “2001 is the year of the consortium exchange.”

Why We Wrote This

Given this changing of the guard, eCFO decided to take a look at the E-marketplace marketplace. Specifically, we wanted to rise above the hubbub and the hype; wanted to provide a little perspective on a sector in turmoil. We figured an aerial view might help CFOs currently considering moving their corporate procurement into cyberspace.

Apparently, that’s a decision a lot of finance chiefs and senior executives are wrestling with these days. According to a survey of US businesses conducted in July by KPMG/EIU, 48 percent of the respondents reported that virtual exchanges would become very important to their own supply chains over the next 18 months.

This doesn’t mean all exchanges are created equal, however. In selecting an E-marketplace, corporate shoppers are advised to stick to trading hubs that are well backed and financially stable. If the builders of an exchange repeatedly push back go-live dates, walk on by. Operators of most virtual exchanges issue glowing press releases about the launch of services. Dig into these releases, and you often discover they’re touting the launch of pilot programs. Remember, the surest indication of a thriving trading community is, well … a thriving trading community. Look for sizable transaction volume.

The best exchanges feature a long roster of suppliers. Top-drawer E-marketplaces also provide financing, as well as settlement and logistical support. That’s important. After all, a great deal on 10 tons of pulp from Yakima isn’t so hot if it costs an arm and a leg to get the stuff to your factory on Baffin Bay.

And despite the industry hoopla, not all E-marketplaces are cost savers. Some don’t have enough suppliers to create a liquid marketplace. Some take too big a rake. Others, often strapped for cash, tend to skimp on services. In fact, in a recent poll of 348 companies conducted by the National Association of Purchasing Management (www.napm.org) and Forrester Research, two-thirds of purchasing managers said their virtual procurement programs had not generated any cost savings so far.

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