Let’s Get…Vertical?

Business-to-business exchanges have the potential to slash costs out of the supply chain and nobody is more excited about that than venture capitalists. In fact, Boston-based AMR Research estimates that 600 such exchanges have sprouted up within just a year and a half as VCs look to cash in on the trend.

As in any overpopulated space, only the strong will survive, while the weak will eventually be either trampled or eaten. And one of the deciding factors in separating the fit from the faint will be whether buyers, who are supposed to use these exchanges to source new and inexpensive suppliers, decide to go vertical or horizontal. Vertical exchanges, such as CheMatch.com and Commerx’s PlasticsNet, operate in a single industry, whereas horizontal exchanges such as SupplierMarket.com try to attract a broader spectrum of participants across multiple industries.

In SupplierMarket.com’s case, the business is simply “parts”, whether those parts are of plastic, metal, wood, plaster or some other material.

Vertical markets – or at least the good ones – offer industry expertise as their key selling point. They can build their trading infrastructures and services on the idiosyncratic needs of whichever industry they serve. Horizontal exchanges are unlikely to provide the same depth of expertise, since they handle multiple kinds of materials. That breadth may, however, provide buyers with a countervailing advantage.

“What [buyers] are really trying to do is get efficiency from the exchange and reduce cycle times,” says Murali Menon, vice-president of engineering for SupplierMarket.com in Burlington, Mass. “We’re capturing a larger percentage of [what we need on] a typical project,” he says of his company’s horizontal approach.

In other words, not only does a buyer that’s building office parks or battleships need steel, but it also needs plastic, glass and other materials, and sourcing all those different products through a horizontal exchange can simplify its purchasing activities.

Some exchanges within each model will likely survive. However, it’s worth noting that among AMR Research’s list of the 40 strongest exchanges, the vast majority are at least beginning life as verticals.