Self-sufficient exchange to offer new way to add value

As the value of public exchanges and semi-private exchanges such as the Covisint LLC consortia are increasingly called into question, a third type of closed-loop, private exchange appears to be gaining some traction.

This week Chicago-based eFS Network Inc., an exchange that comes pre-packaged with participants from all of the key segments of the food service industry supply chain, will move into high gear as it announces its choice of ModelN to build its network infrastructure. The exchange is set to launch in the fourth quarter.

Although the challenge for buy-side trading exchanges such as Covisint and Transora Inc. is to convince suppliers of their value, EFS already has as members and investors most of the major players. They include food operators such as Tyson Foods Inc. and Cargill Inc., distributors and redistributors such as Sysco and Dot Foods, and operators such as McDonald’s Corp.

Suppliers leery of buy-side exchanges being used to beat them down on price may see a trading partnership that includes all of the players as a distinct advantage.

“We see that as a competitive differentiator for eFS because we are neutral and inclusive. We are building a solution that results in cost savings for not just one segment,” said Hank Lambert, CEO of eFS Network, in Chicago.

Lambert believes that eFS will break down the barriers that could result from distrust. “If you have trading partners all standing on the same platform, all those barriers go away,” said Lambert.

ModelN, in San Francisco, Calif., has some experience in this closed model, called a private business network, having built ProvisionX, an exchange for the five largest meat and poultry producers.

One of the broader benefits that such an exchange will deliver to ProvisionX, for example, is its ability to work with buy-side exchanges on an equal footing in terms of size and clout.

However, the eFS exchange does share with other trading models the promise of reducing costs through efficiencies in order management, contract resolution, inventory management, logistics planning, and demand planning and forecasting.

According to eFS, there is as much as US$14 billion in supply-chain inefficiencies in the $399 billion food service industry supply chain.

As opposed to the packaged goods industry, which mainly has supermarkets as its anchor, the food service industry includes all of the components, operators, distributors, and manufacturers necessary when the end customer is not eating at home.

The first two solutions that eFS will tackle are order-to-cash management and data synchronization between distributors and manufacturers.

“These two areas are the best way to attack all of the supply-chain problems at their roots. All the other problems sit on top of these two,” said Ali Tore, who has been working with eFS since its inception as a co-founder and director of product management for ModelN.

Data synchronization includes linking the disparate product and pricing codes and naming conventions between industry segments that lie at the heart of supply-chain inefficiencies, Torre said.

Although the initial focus of the trading network will be on basic revenue cycle automation and synchronization between manufacturers and distributors, operators will benefit as well, said Hank Lambert, the CEO of eFS.

“McDonalds is a visionary company and interested in generating efficiencies. Because they work with their distributors on a cost plus basis, if their distributors costs are lowered, McDonald’s cost come down as well,” said Lambert.

Lambert was referring to the fact that cost plus allows an operator like McDonalds to negotiate a fee with its distributors based on a percentage above the distributors cost.

ModelN’s Torre believes like Lambert that the trend toward a closed loop trading exchange brings value. “That was what was attractive to us, that they had the three segments together in one network,” Torre said. But he warned that there are also challenges.

“Even when you have the major players you need to convince everyone else, the smaller players as well,” Torre said. “You have to show value to them.”