After reading my earlier post on B2B e-Marketplaces, someone asked me – Why write about the B2B e-Marketplaces? It was a long time ago and most of them failed. So who cares? I think George Santayana’s famous quotation is applicable here “Those who cannot learn from history are doomed to repeat it.” This concept is more than appropriate in the B2B e-Commerce sector today when you consider all of the investments in electronic invoicing vendors and supply chain finance marketplaces made during recent years. There is nothing short of an irrational exuberance afoot as everyone from financial institutions to venture capitalists to independent software vendors has been pouring millions in to these technologies. Much like the e-marketplaces, these emerging concepts have strong value propositions, but are over-capitalized with 10X more vendors than the market will support. So I would maintain that there is a great deal to be learned from why the B2B e-marketplaces of the dot com era failed, which is the subject of this post.
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B2B e-Marketplaces – A Look Back Ten Years Later
Some call it the Golden Age of B2B e-Commerce. Others call it the height of insanity. Regardless of your perspective, it is difficult to argue that there will ever be another time like it in the world of B2B e-commerce. The marketplace era witnessed an unparalleled infusion of capital and an unparalleled appetite for risk as entrepreneurs around the world engaged in widespread supply chain innovation and experimentation.
And although there remains a general level of disappointment and remorse with the e-marketplaces, we should remember that these organizations were catalysts for a number of high value supply chain technologies still in use today – e-procurement, reverse auctions, supplier portals, data synchronization (e-catalogs), collaborative demand planning and sell-side order management. In this post, I will revisit the three primary e-marketplaces models with a historical perspective on the pros and cons of each strategy.
Remembering the Marketplaces
B2B e-Marketplaces, or sometimes called exchanges, facilitated the real time transfer of information, money and goods using newfound Internet technologies. E-marketplaces supported a wide range of business processes. Some facilitated the introduction of new buyers and sellers on the Internet for the purposes of developing new relationships. Others specialized in e-procurement models such as “reverse auctions.” In a reverse auction, the supplier (rather than buyers) competes for the right to win business by submitting the lowest (rather than the highest) bid. Still other marketplaces focused on removing information latency in the supply chain and enabling collaboration between participants through the electronic exchange of design, forecasting, inventory, sales, logistics and payment data.
If You Build It…They Will Come
There were three primary types of marketplaces – independent, consortia and private – each with different strengths and weaknesses.
Independent Marketplaces
Independent marketplaces, sometimes called public marketplaces, were the first to emerge in the late 1990s. Founded by venture capitalists and managed by entrepreneurs, independent marketplaces such as Vertical Net and FreeMarkets were pioneers in the B2B e-Commerce revolution. One of the independents’ key strengths was neutrality. Not owned by any specific buyer or seller, the independents were free to develop technology and their business model as they desired. Although, the independents were arguably the most innovative category of marketplace and the most neutral, they are largely extinct today. Some say that the independents were ahead of their time, providing a value proposition that their customers didn’t embrace before the vendors had run out of cash. I think independent marketplaces were victims of their own success. Threatened by the potential disruption to historical supply chain dynamics, leading buyers and sellers rushed to build their own private and consortia e-marketplaces. The result was that the largest potential customers of independent marketplaces quickly became equity partners in their competitors.
Consortia Marketplaces
Starting in late 1999 and throughout 2000 e-marketplaces were formed by consortia of leading buyer and supplier organizations in the major manufacturing verticals. High profile marketplace formations included Worldwide Retail Exchange (Retail), ChemConnect (Chemicals), Quadrem (Metals/Mining), SupplyOn (Automotive) and Transora (Consumer Goods). Retailers, OEMs and suppliers provided capital in exchange for an equity stake and a governance role in these new e-marketplaces. The consortia were well positioned to generate revenues as they enjoyed instant participation from their owners following formation. Perhaps, the consortia biggest challenges were with the governance models. Not only were there many different owners of these exchanges, but most were cutthroat competitors, which complicated decision making and strategy. For example, the consumer goods marketplace Transora had 49 different equity investors! However, more fundamental challenges existed with consortia’s perceived lack of neutrality. While many buyers and sellers took equity stakes in marketplaces others (such as Wal-Mart) stood on the sidelines. For the consortia marketplaces to grow they needed to gain the participation of additional non-affiliated buying organizations. However, these non-affiliates were reluctant to share sensitive pricing and product information on an exchange owned by their competitors. Nor were they interested in paying transaction fees which ultimately flowed back to these same competitors.
Commerce One – Leading Provider of Exchange and Marketplace Technology during the Dot Com Era
Private Marketplaces
Major buying organizations not affiliated with any exchange (as well as many consortia investors) began to develop private marketplaces starting in 2000. Perhaps, the largest and most successful is Wal-Mart’s RetailLink. The private marketplaces had instant critical mass as both the buyer and its community of supply chain partners were immediate and captive participants. Most private marketplaces were built upon existing supply chain transaction systems such as EDI, which already exchanged high volumes of data. The goals of private marketplaces were simply to improve supply chain efficiency, rather than to generate transaction fees or grow towards an IPO. Funding was provided as part of the traditional IT budget rather than through external capital markets or equity investments. Private marketplaces avoided many of the governance and intellectual property issues that hampered the independents and consortia. The buying hub could control the marketplace’s roadmap and security of all transactions exchanged.
And the Winner Is…
It is interesting to look back in hindsight and contemplate which of the models was best. I would have to argue the private marketplace model was the winner, as they account for the majority of exchanges still in existence today. A handful of the major consortia marketplaces such as Global Health Exchange (GHX), Exostar and Elemica have transformed their value proposition into a long-term business model. Some have enjoyed more success than others. For example, e2open recently reported 35% growth for its 1st half 2010 fiscal year. And Covisint is planning a $1B IPO. In many cases, these vendors have survived by generating a sustainable, recurring based of revenue from EDI transmissions. Ironically, EDI is the very technology most of these marketplaces set out to destroy! Read part 2 of this post – Top 10 Reasons the B2B e-Marketplaces Failed.
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The Incredible HULFT – My Favorite B2B Network Protocol
Of all the various B2B Communications and Managed File Transfer (MFT) protocols in the market, HULFT is probably my favorite. AS1 is probably a close second. Not only is HULTFT fun to say (Try using it in a sentence), but it provides a strong alternative to Sterling’s Connect: Direct product. HULFT is not a standard, although in some countries it effectively could be as it enjoys incredible popularity and market share.
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What are some of the key drivers for integrating ERP and B2B systems?
In my previous blog entry relating to ERP I discussed how the automotive industry has become so reliant on these systems for running their day to day manufacturing operations. Implementing an ERP or B2B system are the two most labour intensive IT projects that can be undertaken by a company.
Quite often, ERP projects will use a large amount of IT resource and in many cases resources that would normally be used to manage B2B infrastructures will be diverted to an ERP project instead. This could potentially put a company’s B2B infrastructure at risk if any problems occur or if there are issues with on-boarding new trading partners for example. As ERP systems are integrated to nearly every aspect of how a company operates, if there are delays with either implementing a new system or upgrading to a new ERP version then this will have serious implications further down the line. But what about those companies who are keen to integrate their ERP and B2B systems? For companies that have either been newly divested from a parent company or find themselves in a position where they are switching to a new ERP vendor, this can sometimes offer the best time to integrate to a B2B platform. After all, the company will be able to start from a clean sheet of paper. At GXS we have seen an increase in the number of customers wishing to integrate their ERP and B2B systems together, and many as a result of trying to consolidate numerous instances of an ERP system which are located in different locations around the world.
Due to the demands placed on a company’s IT resource during an ERP related project, outsourcing the management of a B2B infrastructure and any associated integration to the ERP system can bring significant operational and financial benefits to a company. Quite often GXS are seen as an extension of the many IT departments that we work with around the world. So what are the key drivers for companies having to integrate their ERP and B2B systems together in the first place?
- Most data used by an ERP system is obtained from outside the organization
- Data that is fed into an ERP system is often inaccurate
- Lack of ERP/B2B integration can lead to less informed business decisions being made
- Integrating to global ERP instances can be a challenge
So let me just spend a few minutes looking at each of these drivers in turn
Most data used by an ERP system is obtained from outside the organization
Most data used by an ERP system is obtained from outside the organisation. ERP systems use information from a variety of external sources, for example distributors, logistics providers and financial services institutions. This information could originate in numerous business systems and could have been created using different industry related standards. Due to the global nature of many companies there are constant challenges with on boarding suppliers and getting them integrated to a company’s ERP platform. The on-boarding capabilities of a vendor such as GXS can really help to accelerate the speed with which new trading partners are on-boarded. Irrespective of their technical capabilities, GXS can ensure that trading partners have the correct electronic trading capability in place and at the same time provide a seamless integration to the ERP system.
Data that is fed into an ERP system is often inaccurate
As ERP systems receive information from a variety of external partners there is an increased chance that unchecked, inaccurate data could enter an ERP system. Quite often, information from external sources is not clean enough to be processed correctly by the ERP system. This will quite often lead to manual rework of the incorrect information to try and make it compliant. If unchecked information is allowed to enter an ERP system then there is a chance that it could spread into other business systems leading to inaccurate information being used across the extended enterprise. A simple mismatch of part numbers for example could lead to incorrect electronic documents being created which could result in delayed payments to suppliers.
One of the main benefits of integrating an ERP and B2B system is that it is then possible to establish what can best be described as a firewall around a company’s ERP system. The aim of the firewall is to protect the ERP system and ensure that incorrect data does not enter the system. Whether you are trying to protect your ERP system from information being sent in by customers and distributors, logistics providers, suppliers or financial institutions, integrating to a B2B system can provide a higher level of security around your ERP applications and downstream business processes.
Lack of ERP/B2B integration can sometimes lead to less informed business decisions being made
These systems need to process information from various internal and external sources. Business decisions, especially in tough economic times, need to be made in real time and this cannot be achieved if data has to be re-worked and re-entered into the system. Without a fully integrated ERP and B2B environment it is difficult to gauge the true pulse of how the company is operating. If a company does not have visibility into any potential problems then it is very difficult to take any corrective action.
For many companies, getting access to real time information and ensuring that the platform is available 24/7 is crucial to the operation of their business. For example many high tech manufacturers insist that their IT infrastructure does not go down near the end of a quarter so as not to affect sales. In another example, if a car manufacturer does not receive an ASN to notify them that parts are on their way to a factory then this can have downstream implications as well which could lead to a production line shutting down. Automating the flow of information via the integration of ERP and B2B systems ensures that business critical transactions can be processed in real time.
Integrating to global ERP instances can be a challenge
Globalisation has forced many companies to establish new manufacturing plants and offices around the world and as mentioned earlier, many companies operate multiple instances of ERP systems to support their global business. Ensuring that these instances are fully integrated to provide one enterprise wide view of ERP related information is a challenge. Having to work across different time zones and trading partner communities, who may be speaking multiple languages, can impact the overall efficiency of a supply chain as well.
Ne xt week I will discuss how B2B outsourcing can help address some of these issues. Until then I have a question for you, what challenges is your company facing with trying run ERP and B2B systems across your business?
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Where Supplier Portals Went Wrong
There is no dispute that portals have changed supply chains forever. However, as with many disruptive technologies, not only has a new set of benefits been introduced, but also a new set of challenges.
The early success experienced by portals led to an overly aggressive expansion of their usage in the supply chain. Consequently, a number of unforeseen negative consequences have arisen from supplier portals.
Listed below are four of the major problems created by portals.
#1 – Too Many Portals
Small suppliers can provide better service to their customers by engaging with them electronically for routine transactions such as PO acknowledgements, advanced shipment notifications and invoice submissions. However, most small suppliers do not just sell to one customer. Most suppliers sell to multiple different companies.
Consider a small German auto parts manufacturer that sells to Volkswagen, Daimler and BMW or a small American food supplier that sells to Safeway, Kroger and Wal-Mart. Each of these suppliers has to login into three separate portals on a daily basis to interact with their customers. While the customers benefit by automating supply chain processes, the supplier’s costs are higher due to the added complexity and duplication in their daily business processes.
#2 -Swivel Chair
Most of the data that suppliers key into customers’ portals already exists in digital format within their own in-house systems. While small suppliers may not be running SAP or Oracle, many of them do run small business accounting packages such as Sage, MYOB or Quickbooks. When a purchase order is received in a customer portal, it must then be rekeyed into the supplier’s accounting system.
Similarly, when a small supplier needs to send an invoice they will have to re-key the data that is already in their billing system into the customer’s portal. This process is frequently referred to as “swivel chair” due to the fact that the supplier has to switch back and forth between two different applications. The re-keying process not only creates a duplication of effort for the supplier, but it leads to higher probability of error due to the increased possibility of typographical errors.
#3 – Manual Processes
Contending with multiple portals is not a problem limited to only small suppliers. Much of the information and functionality contained on a portal cannot be obtained through any other means. For example, information about changes to routing guides, contact details and business processes can only be downloaded from a portal. Many buying hubs only make sourcing opportunities, payment status and performance scorecard information available via the portal.
In other cases, processes such as collaborative design and joint promotions planning can only occur through manual interaction on a portal. Requiring suppliers to pull information rather than pushing it to them creates more work for suppliers and it introduces the opportunity for missed communications.
#4 – EDI Replacement
Some buying hubs have embraced portals holistically for all supplier interactions. These organizations have suspended the exchange of point-of-sale, manufacturing forecasts and product catalogs via EDI and XML transactions. Instead suppliers are required to manually process the data.
For example, an electronics supplier receiving a manufacturing forecast from an OEM would have to download the data from the portal then re-key it into their ERP application. Once the forecast was analyzed, the supplier would then have to take the results from the ERP system and re-key them into the customer’s portal. These examples are becoming more and more common in the supply chain.
EIDX Insights on Portals
The Electronics Industry Data Exchange (EIDX) group, which was recently disbanded by its parent CompTIA, performed some very insightful analysis of portal usage in the high tech sector a few years ago. EIDX found that manually inputting data such as a sales forecast from a portal took an average of 90 minutes as compared to only 5 minutes on average with EDI.
Due to the extensive time commitments required, portals increased the number of support staff required from a ratio of 84:1 with EDI to 5:1 with portals. This is clear, quantitative evidence that when used as an EDI replacement portals are, in fact, leading a regression in the level of supply chain automation between trading partners.
92% of the EIDX survey respondents stated that they preferred system-to-system communications via EDI or XML over portals. However, most indicated that they believed portal usage would increase rather than decrease in the coming years.
Why would a buying organization push the use of portals over EDI and XML when there is such an obvious decrease in productivity? I will offer some theories:
- Simplified Interfaces – Large, multi-national corporations have too many entry points for B2B communications. Organizations which have grown by acquisition have a spaghetti-like mess of VAN connections, web forms and direct Internet connections. Centralizing all B2B transactions into a portal greatly simplifies the technology architecture for the buyer. Enrollment, security, reporting and enhancements can all be centralized into the portal significantly reducing the cost of maintenance.
- Data Quality – Through the use of a portal connected to an ERP system, buying organizations can ensure that only high quality data is received from suppliers. Portals can enforce the completion of all mandatory fields by a supplier. Data in fields can be limited to only a small list of choices available in a pull-down box on the user interface. Such data quality enforcement cannot be accommodated easily in traditional machine-to-machine EDI transactions. Furthermore, errors can be minimized through the use of “turnarounds” which are pre-populated forms based upon a related document. For example, 80% of the data in an invoice can be generated from the original purchase order.
While these arguments provide positive ROI for buyers, they add significant costs for suppliers. Such win-lose propositions are bad for the supply chain. Dr. Hau Lee of Stanford University once stated that
“Instead of company to company competition, we are now in an era of supply chain to supply chain competition.”
When developing a portal strategy companies should evaluate the overall cost and complexity impact to not only their own business, but to their trading partners as well.
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Benefits of Supplier Portals
Portals were one of the innovative new technologies introduced during the dot com era. But unlike marketplaces, exchanges and other failed concepts, portals successfully gained widespread adoption. In fact, portals have been both a disruptive and transformative force in the supply chain. As we look back on the past ten years of evolution I think it is interesting to discuss both the positive and negative impacts portals have had on the supply chain.
Below are some of the benefits of supplier portals. In my next post, I will outline some of the negative impacts of portals, which will help to make the case for my AS5 proposal.
Portals can enable 100% Supplier Enablement, checklist available here.
A few of the benefits enabled by the introduction of supplier portals include:
- Broader Supplier Enablement – Portals enabled a new tier of suppliers to automate routine supply chain execution transactions such as purchase orders, ship notices and commercial invoices. EDI had gained a critical mass of usage amongst larger companies. However, smaller businesses often struggled to find the resources, budget and in-house expertise to implement EDI. Portals filled the white space in the market quickly. Anyone with a PC and an Internet connection could connect to a portal with minimal training and investment. As a result, the barrier to entry for e-commerce was lowered enabling tens of thousands of small suppliers to interact with customers electronically.
- New Business Process Automation – Portals enabled a new group of business processes such as strategic sourcing, collaborative design and demand planning to be automated. Historically, these processes occurred over the phone, via e-mail correspondence or in face-to-face meetings. Due to their complex nature these supply chain practices were too sophisticated to automate through machine-to-machine transactions. By moving these processes on-line, portals reduced not only the cost of these transactions, but the latency of information sharing and the barriers to adoption.
- Supplier Self-Service – Portals offer a lens into the buyer’s ERP system. Inquiries that would need to have been conducted via a time-consuming game of phone tag could instead be performed with just a few mouse clicks. For example, a high percentage of the call volume to accounts payable organizations is from collections personnel in the supplier organization attempting to determine when an invoice will be paid. Portals offer the ability for suppliers to perform self-service inquiries online whenever they need to know the status of an expected payment.
- Collaborative Processes – Portals provide both supplier and buyer a single, shared view of data. Historically, personnel from buyer and the supplier each viewed data in their own business applications which were hopelessly out of sync. With portals both supplier and buyer share a common view of data such as performance scorecards. The newfound visibility enables the two parties to collaborate on corrective actions to improve overall supply chain performance. Dispute resolution is another process which benefited from the shared view on a portal.
- Change Management – Supply chains are constantly changing. Buyers open up new distribution centers, manufacturing plants and retail stores, which changes routing guides. As business process re-engineering occurs, new and improved forecasting, purchasing, labeling, shipping and invoicing procedures are introduced. Portals provide an online resource for buyers to communicate changes to contact details, routing guides and business processes to the supplier community. Historically, these changes had to be communicated to each supplier through direct mail, phone conversations or vendor conferences.
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What can Dominos Pizza Teach us About Supply Chain Visibility?
Last weekend we had some friends over to visit our house and rather than cooking we decided to place an order for pizza delivery from Dominos. Ordering a pizza today is amazingly convenient. We didn’t even have to pick up the phone. Instead we placed the pizza delivery order online using the Dominos web site and a credit card.
The fact that you can order a pizza online should probably come as little surprise in today’s increasingly Internet-centric world. What did surprise me, however, was the new Domino’s Pizza Tracker site that provides you a step-by-step update on the status of your order.
Using the phone number that you used to place the order you can login to a graphical interface that monitors the progress of your delivery. The web site also displays the street address of your delivery, the complete contents of your purchase and the exact time of your order.
The tracker shows five different steps throughout the food preparation and delivery process:
- Order placement
- Food preparation
- Baking
- Boxing and packaging
- Delivery en route
My tracker even told me the name of the driver who was coming to our house! All that was missing was a link to the driver’s MySpace page so you could learn more about he or she before they arrived….
Dominos launched this new tracker service on January 30th. I am not sure exactly how it works, but the system somehow ties the local operations systems in each store to the B2C web site on a real time basis. One thing I will bet on is that it doesn’t use RFID.
The tracker site is one of the more customer friendly web experiences that I have seen in recent years. In fact, there is even a survey that consumers can fill out after the delivery to comment on their experience. So as I ate my pizza I started thinking about the idea of providing customers real time visibility into the status of their orders. And I began to relate this to some of the customer visits I have conducted recently with multi-national corporations in the automotive, high tech and retail industries.
One thing that I am consistently surprised by is how little visibility many of the largest companies have to inventory moving through their supply chains. Most of the order management portals large manufacturers provide their customers don’t come anywhere close to the supply chain visibility that Dominos offers its consumers.
So I ask you – if the average Dominos franchise with an employee base of 10 and annual revenues of $580K can notify me of the exact time that a pizza is boxed and taken out the door for delivery, why can’t a multi-billion dollar manufacturer of airplane parts be able to tell their customers when a $50M shipment of goods has arrived at a port and cleared US customs?
The good news is that many manufacturing leaders seem to be recognizing the challenges associated with lack of supply chain visibility. We have seen a recent surge in interest amongst large manufacturers seeking to provide their key distributors and customers with better visibility to outbound shipments. The highest concentration of demand seems to be with industrial goods manufacturers who are seeking better quality data on ocean freight traversing long distance trans-Pacific routes.
Consumer products companies are slightly ahead of their peers in the automotive, high tech, aerospace and industrial machinery sectors when it comes to supply chain visibility. In the industrial sector, it is not uncommon to find that neither buyer nor supplier has visibility to the location and status of shipments of goods once they leave the manufacturing plant.
Interestingly, this situation applies even to high value goods including consumer electronics such as high definition plasma televisions, kitchen appliances such as refrigerators and computing equipment such as robotic tape backup libraries. Not only are these expensive goods targets for theft and counterfeiting, but many of them can be easily damaged without proper handling.
Due to the value of the goods, suppliers often purchase cargo insurance to protect against these types of threats. Also due to the value of the goods, many suppliers seek out third party financing for their inventory in transit. The financing frees up working capital that would otherwise be tied up in long distance supply chains.
So the point here is that we have multi-million dollar shipments of industrial goods insured and financed by third parties and no one other than the transportation provider holding the actual inventory seems to know the location at any point in time.
Should industrial manufacturers hire pizza delivery persons to help them? That is probably unnecessary. But they should consider investing further in transportation management applications, particularly in logistics visibility suites that offer customers insights into the status of inbound freight.
