Trading Networks: The Link to Streamlining Your Supply Chain

Contents
A Growing Global Market
Buyer, Seller Benefits
Getting Started

By Richard J. Ruiz

To make the most of their Internet strategies and maximize profits on online buying and selling opportunities, companies today need to understand one of the hottest segments of the business-to-business marketplace: trading networks.

Independent trading networks—also known as e-marketplaces, business-to-business portals, vortels, hubs and e-exchanges—are secure online marketplaces that bring together buyers and sellers in a common vertical industry and facilitate the real-time transfer of information, services and goods. Typically, trading networks are operated by intermediaries known as e-marketmakers and are established within enterprises, vertical and horizontal markets and geographies.

As companies look for new ways to increase operational excellence throughout the supply chain, trading networks have emerged as an innovative way to increase revenues, reduce expenses, make full use of assets and help improve customer service.

A Growing Global Market
Industry analysts predict explosive growth for trading networks over the next few years. By 2004, the 400 trading networks in existence today are expected to grow to more than 10,000, with the total market value of business-to-business commerce reaching nearly $1.5 trillion, according to a recent eMarketer's eOverview Report.

The Gartner Group projects an even greater opportunity of business-to-business volumes in the United States reaching over $7 trillion by 2004.

Wherever the actual numbers fall, it's clear that trading networks will flourish in the next decade and become integral parts of the new Internet economy. Companies looking to maintain a competitive edge in the expanding Internet marketplace will have to determine how to participate, and how to use trading networks to their best advantage.
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Buyer, Seller Benefits
Trading markets exist and continue to grow because buyers and sellers recognize an advantage to engaging in new forms of trade. Faced with the growing level of clutter and noise on the Internet, buyers and sellers benefit from the direct, targeted exchange that trading markets enable. In addition, economies of scale exist as more participants join, which spells lower cost of goods or services. A trading network empowers its participants to offer goods and services at below-market prices, while often providing next-day delivery anywhere in the world.

For buyers, which include individual companies and purchasing consortiums, the motivation is to reduce costs while enhancing procurement efficiency. Additional important benefits include:

• Elimination of maverick buying. The National Association of Purchasing Managers estimates that one-third of purchasing is not compliant with established company procedures.
  
• Savings from improved discounting and better negotiation at between 2.5 percent and 10 percent, and reduced administrative costs, with savings per order estimated between $50 and $100, as estimated by research firm AMR.
  
• Identification of new suppliers. Buyers find it much easier to identify, qualify and measure the performance of new suppliers.
  
• Faster time to market. Increased collaboration between suppliers, buyers and customers reduces the time to develop, produce and distribute new products. Improved communications enables stronger and more beneficial relationships between parties.

On the sell side, primary benefits of participation in e-exchanges are increased revenue opportunities through global reach and acquisition of new customers. According to AMR, estimates based on early results show an increase in sales between .25 percent and 7.5 percent. For existing customers, sellers can use trading markets to provide round-the-clock availability, more frequent ordering, increased convenience, higher per-order amounts, and the ability to suggest additional items and substitutes. Results suggest that the combination of all these factors can lead to an increase in sales of as much as one third.

Other benefits to sellers include:

• Reduced time to market through elimination of catalog cycles. E-exchanges inform customers in real time, shortening the catalog cycle by up to 60 days and increasing new-product sales.
  
• Lower costs from order processing, which typically drop from between $10 and $75 to under $3 each.
  
• Better order accuracy, resulting in a 40 percent to 80 percent reduction in return rate as order backlog is reduced.
  
• Increased exposure to new buyers and sales opportunities. Sellers can showcase products to the global marketplace 24 hours a day, 7 days a week.
  
• Market intelligence. Suppliers gain a much better insight into industry trends and key customers' buying patterns.
  
• Anonymous posting of excess inventory. E-marketplaces provide a supplier with anonymity to liquidate excess inventory without jeopardizing their ability to maintain established prices and terms.
  
• Leveled playing field for smaller organizations. E-marketplaces do not discriminate by size, and therefore enable small buyers and sellers to compete more effectively.

Getting Started
So what do today's companies need to do to enter the lucrative market of conducting business-to-business transactions over the Internet?

Companies should work with vendors that offer open network-based commerce services, including payment, logistics, auction and collaboration. Numerous solution providers, including IBM, advocate a truly open business-to-business platform for the marketplace and the enterprise. Multiple levels of openness facilitate a range of benefits, such as interoperability standards that allow open connections between buyers and supplier-commerce applications and global industry marketplaces.

For example, Chemdex, the leading provider of B2B e-commerce solutions for the life-sciences industry, partnered with IBM to bring together life-sciences enterprises, researchers and suppliers to efficiently buy and sell products on the Web, streamline business processes, enhance productivity and reduce costs. Acting as a Net marketmaker for 2,000 suppliers and thousands of researchers in more than 70 enterprises, Chemdex offers nearly 1 million products in an extensive online marketplace. This e-marketplace also offers procurement applications tailored to the unique business requirements of each customer, and comprehensive service and support systems.

By building an open platform, Chemdex provided a single connection to value-added marketplace service providers with additional functionality that can include: financial services and logistics; an architecture that will allow integration of key functions and capabilities from other application vendors; and the ability to run on multiple hardware and software programs. Using best-of-breed technologies IT vendors, including IBM, led to the creation of an integrated business-to-business marketplace solution that enables companies to rapidly build and deploy full-service marketplaces.

To accelerate the ability to participate in trading networks, companies must focus on integrating their supply chains. An integrated enterprise-commerce solution helps businesses effectively enable their buying, selling and supply-chain processes from order to fulfillment, and allows them to tightly integrate their processes to customers, suppliers and marketplaces. This includes linking a company's Web front-ends to its back-end systems.

Medium-sized—or midmarket—companies in particular stand to realize significant savings by participating in e-marketplaces. Whereas large companies may already have their own proprietary e-marketplaces and small companies may not yet need them, midmarket firms that want to compete in e-business must develop an end-to-end, supply-chain/enterprise infrastructure. The growth these companies experience often refocuses the business model by highlighting the importance of supply-chain relationships.

The bottom line is that today, companies of all sizes are competing at some level in the global marketplace. That means they must be ready and able to form partnerships outside traditional channels. And these relationships must be as efficient as possible. That's why these businesses need to link with an IT company that can help them remain flexible as they devise growth strategies, drive business efficiencies and become full participants in today's global network.

Richard J. Ruiz is director of marketing management for IBM's Global Midmarket Business Division.
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