You could hardly call it a ringing endorsement. Mark Engle, senior director of IT e-commerce with Campbell Soup Co., was talking about the way his company views public trading exchanges, as a means of hooking up with retailer customers. "I've now found enough benefits that it's no longer that bothersome to me," Engle said at the annual user conference of i2 Technologies in Las Vegas earlier this year. "Back in May of 2002, I might have thought so. But it's not that horrible to be dealing with this space."
"Not that horrible": For some companies currently utilizing public trading exchanges, that's as good as it gets. Four years ago, exchanges over the internet were viewed as the killer app for buyers and sellers looking to do business together. All the inefficiencies of traditional commerce would vanish, as the World Wide Web guided users along the fast path to nirvana.
It was not to be. Manufacturers and retailers alike began questioning the value of sharing sensitive business information with competitors. Vendors worried that open auctions for their goods and services would erase already thin margins. The communications standards to make it all possible were sorely lacking. And business, for all its talk about the need for change, was slow to revamp key processes needed to support a new level of collaboration.
What emerged instead was the notion of private trading exchanges (PTXs), driven by individual companies behind their firewalls. Suppliers could come together in one place, but in the service of a single buyer. Such models have flourished, with virtually every big buyer of manufactured goods setting up some kind of network for dealing with suppliers over the internet.
Yet public exchanges aren't entirely dead. On the contrary, they continue to serve a vital if limited role in fostering collaboration among multiple trading partners. The dwindling number of survivors, searching for a niche, have branched out with a variety of new products. In the future, experts says, there will be room for both models - although they probably won't look the same as today.
"The big centralized play never really took off," says Andrew White, research director of enterprise and supply-chain management with Gartner. Name-brand manufacturers didn't want to publicize their business transactions, he says. Many preferred to create private exchanges drawing on data already contained in their enterprise systems.
The original notion of trading exchanges saw suppliers participating in a regular series of auctions, yielding buyers the lowest possible price on finished goods for retail, and components for manufacturing. And while auctions still take place within such groups as the Worldwide Retail Exchange (WWRE), they're nowhere near on the scale that was originally envisioned. Most savings are on a one-time basis only, says White; they are of little value over the long run.
Large suppliers held back from the start, fearing that exchange-based auctions would be little more than a tool for beating them down on price. Buyers saw that valuable strategic partnerships were in jeopardy. Says Bob Parker, industry strategist with AMR Research Inc.: "It's very unlikely that suppliers will cooperate enthusiastically unless they also benefit from the relationship. There has to be an ROI for them, too."
A handful of public exchanges, also known as e-marketplaces, continues to survive in major industries. Retailers still support WWRE and the GlobalNetExchange LLC (GNX) in the U.S., along with CPGMarkets in Europe. The automotive industry has Covisint, launched in 2001 by DaimlerChrysler, Ford Motor Co., General Motors, Renault, Nissan and IT partners Commerce One and Oracle Corp. (PSA Peugeot Citroen joined later). Automotive suppliers, fearing the power of Covisint to dictate price, responded with the German-based SupplyOn. Other surviving exchanges include Exostar in aerospace and defense, RubberNetwork in the tire and rubber industry, and Elemica and ChemConnect in chemicals and plastics.
Covisint Finds Itself
The Covisint story is typical of the confusion and directional shifts that have marked the public exchange sector in its first four years of life. Covisint was supposed to be the centralized hub for the sale and purchase of billions of dollars worth of automotive production parts. "Instead it was dogged by indecision and a failure to declare clear intentions to the industry in its early stages, creating confusion amongst suppliers," says AMR analyst Nigel Montgomery in a report from earlier this year.
Covisint went through multiple changes of leadership; more recently it has become a provider of outsourced IT services to the Big Three automakers. New ventures include Covisint Connect, a data-messaging service linking manufacturers with Tier I suppliers through industry-developed standards. Auctions, a key part of the original conception, have taken a back seat to such programs.
In addition to their unwillingness to share business intelligence with rivals, automakers realized that the processes by which they worked with suppliers and other vendors were themselves competitive tools. As Parker notes, GM outsources more than half the design content of a popular model of SUV. The automaker thrives on the "ability to partner with key players using private mechanisms."
So it goes with the countless other discrete supply chains that exist within the automotive industry. As such, "the notion that a Covisint can provide something universal is counterintuitive," says Parker.
Formed in the summer of 2000, SupplyOn was a direct answer to Covisint by Tier I automotive suppliers, says Markus Quicken, a member of the group's executive board at headquarters in Munich, Germany. Inaugural members were Bosch, Continental, INA and ZF, with SAP AG named as primary technology partner. SupplyOn offers tools in support of collaborative purchasing, logistics and engineering on behalf of 3,650 customers. Most are acting as suppliers, although 10 buying companies use the service as well, in conjunction with their private exchanges.
Among SupplyOn's newer products is electronic data interchange via the web. It's geared toward small and medium-sized suppliers who can't afford the cost of a traditional EDI link with manufacturers. The needs of those suppliers were not being addressed by Covisint, Quicken says. Other services from SupplyOn include applications hosting, a customer-support hotline, and training.
Retail Merger Canceled
In the retail and consumer packaged goods sector, the dust is only now beginning to settle from the aborted merger earlier this year between WWRE and Transora, an e-marketplace formed by manufacturers that has since morphed into a provider of data-synchronization services. Advocates of the marriage touted the benefits of a single exchange involving both retailers and CPG suppliers, but the latter ultimately decided they wouldn't have equal power in a combined organization. They also wanted the freedom to do business with all retailers, not just WWRE members.
Despite the failed merger, "we have stayed exactly on plan," says Nick Parnaby, global director of WWRE in Alexandria, Va. The organization aims at supporting "the whole value chain," from product design through order forecasting and sales. In addition to acting as a trading exchange, WWRE also provides technology for supply-chain collaboration, sourcing and order visibility. Its 58 retailer members include such major players as Tesco, Target, Marks & Spencer, Kmart and Safeway. It also has 15 manufacturers, who were welcomed into the fold in 2001.
What has changed in four years, says Parnaby, is "the timing and execution of what can be delivered and when." The development of global standards and protocols for the exchange of business data has been a slow, agonizing process. Exchanges have been forced to act as translators between partners with different standards, much as value-added networks (VANs) serve as go-betweens in the world of classic EDI. But that hasn't stopped WWRE from developing new services for its members, including support for Collaborative Planning, Forecasting and Replenishment (CFPR), an industry-developed process for cooperating on product promotions and fulfillment.
Many activities continue to take place within retailers' firewalls, Parnaby acknowledges. But he argues that WWRE can reduce the cost and time of adopting technology in support of collaborative processes. Members needn't undergo the painstaking process of integrating systems with those of business partners. WWRE has also been a strong supporter of the global data registry known as UCCNet.
Auctions continue to take place, but suppliers' fears of price gouging have not materialized, Parnaby says. Only about 5 percent of goods are eligible anyway, with branded products not included. Nevertheless, he says, WWRE members have realized $1bn in savings, out of $6.5bn in sales conducted over the exchange.
Transora Changes Direction
Ken Fleming, president and chief operating officer of Chicago-based Transora, is frank about his group's shift in direction. "We've changed drastically," he says. From a trading exchange similar to that of WWRE and GNX, it has become an organization dedicated mostly to the task of data synchronization.
Unilever, Procter & Gamble, Coca-Cola and Kraft Foods were among the 51 original investors in Transora, which started out with the usual menu of auction services and CPFR applications. But they paled beside the real revenue generator: a means for trading partners to share information behind their respective firewalls. Transora became the intermediary, which could receive and disseminate that data despite a lack of communications standards. It also makes up for differences in local languages and regulations. And it relies on the internet, not a costly VAN, as in the case of EDI.
"This was a market that was untapped," says Fleming. "The idea of data synchronization has been declared foundational for e-marketplaces." In the course of developing the application, Transora ended up partnering in various ways with former rivals WWRE and GNX.
At the same time, Transora saw that many businesses preferred to bypass public exchanges altogether. "We found that the sourcing of products and supply management is something that a lot of companies have built up as a real core competency," Fleming says. For those organizations, "it's not a good idea to shift it to a third-party."
Still, he sees value in both models. Among Transora's biggest users is Nestle, which also has a thriving private trading exchange. Either way, Fleming says, the grocery and CPG sector is ahead of other industries in the push for data synchronization, although "near-verticals" such as consumer electronics and pharmaceuticals are beginning to catch up.
San Francisco-based GNX has found its niche as a creator of hosted platforms for collaborative commerce between manufacturers and suppliers, especially in the area of sourcing and procurement. Formed in early 2002, its retailer members include Carrefour SA, J Sainsbury plc, Sears, Roebuck and Co., and Federated Department Stores. GNX differs from WWRE in that its board of directors is made up entirely of companies that do not compete directly with one another.
Judy Gilbert, vice president of marketing for GNX, says the organization also offers a much narrower range of products than WWRE. "We've stayed focused on the things our customers tell us they need to create value." CPFR is a key aspect of those services, although members don't use all nine of the steps as defined by CPFR's development group, the Voluntary Inter-industry Commerce Standards Association (VICs).
GNX's CPFR product is centered on the management of order fulfillment and delivery, promotions and replenishment. It also supports collaborative product development. The group's recently released Performance Management software lets retailers and manufacturers share benchmarking data, based on a set of key performance indicators. Sainsbury's Supermarkets Ltd., the big U.K.-based grocer, is piloting the tool.
Gilbert, too, believes companies with existing PTXs should take a look at what GNX has to offer. As internal systems age and require expensive upgrading, some businesses are exploring the group's publicly available services, she says.
Organizations like GNX can also help companies collaborate in the absence of standardized communications protocols. "Standards are good," says Gilbert, "but we've found that waiting around for them to be fully in place isn't a great way to get value out of your business. A lot can be done in the meantime."
Vendors Falling Away
As the universe of public trading exchanges has shrunk, so has that of supporting software vendors. Systems are now contained within larger enterprise suites, such as those of SAP, rather than in the products of stand-alone vendors. In addition, says White, many companies are customizing software in-house to create private extranets for sourcing and procurement. Parker says they are largely relying on basic software infrastructure tools from big vendors such as Microsoft, IBM and BEA Systems.
Dallas-based i2 Technologies was a major player among software vendors in the early days of public trading exchanges. But the concept of private exchanges has proved to be "a lot more sustainable," says Razat Gaurav, director of product marketing and strategy. In the end, he says, many companies saw no need for a separate entity to deal with suppliers.
i2 now concentrates on providing the software and technology to make exchanges work, whether they're public, private or horizontally focused (offering specific services, such as logistics, across industries). Its FreightMatrix is a hosted, subscription-based product that can be used to manage such processes as transportation, bid processing and rate negotiations. Michaels Stores, Inc. is among the customers using FreightMatrix to do shipment planning, optimization, load tendering and tracking. i2 also supports licensed applications running in a private environment, Gaurav says.
Private exchanges will continue to dominate, he says, although public entities will play an important role in areas such as visibility of shipments in transit. One possibility is a model whereby "you keep data behind the firewall while you leverage a public network." Hosted public exchanges will prove most valuable for mid-sized companies, not the big companies that were originally targeted, he says.
Sunnyvale, Calif.-based Ariba Inc., a vendor of electronic sourcing applications, is a natural player in the world of supplier exchanges. But Jennifer Chang, product marketing manager for e-procurement, says many public entities fell by the wayside with the economic slowdown, and slackening of demand. Procurement managers "went back to what they were doing within the four walls of the corporation."
Ariba has therefore focused on facilitating e-procurement internally, providing a complete set of tools for managing contracts with suppliers individually. In the process, it has branched out from indirect procurement to strategic sourcing, whereby manufacturers acquire parts for production. Applications include Ariba Supplier Network, an electronic "conduit" for buyers and sellers to do business together. Currently more than 60,000 suppliers participate in the network, says Chang.
Not a means of aggregating spend, the Supplier Network is merely a tool for linking business partners on a one-to-one basis. Chang believes the public exchange model will largely be limited to spot purchases, "where there's no long-term competitive advantage."
Gartner's White sees future success in a hybrid model of exchange, with procurement managers doing most of their business in private environments, yet calling on the public exchanges for supporting services, standards and technology. Still, companies are just beginning to sort out the remaining players, and determine how best they can link up with key suppliers, software vendors and trading exchanges. Said Transora chief executive officer Judy Sprieser, at the i2 conference: "It's been a rather bumpy and messy ride to self-realization."
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