Companies opting for private exchanges

Public and industry-sponsored business-to-business marketplaces that boast access to thousands of new buyers and sellers are grabbing all the headlines, but behind the scenes, tens of thousands of companies are opting for private digital exchanges to electronically link a deliberately reduced number of key suppliers.

Take Nypro Inc. The US$600 million injection molding company buys the bulk of its raw materials from prequalified suppliers it has brought together over a private digital exchange built with software from Commerx in Chicago.

“I’m clearly on the side of paring down and creating better relationships with my existing suppliers, because it’s by integrating with your suppliers and sharing forecasts that you can get the economies everyone is talking about,” said Mike MacKenty, director of information technology at the Clinton, Mass.-based manufacturer. “I think that’s where the movement will be long term.”

So does Gartner Group Inc. in Stamford, Conn., which estimates that some 30,000 private exchanges are in various stages of development, compared with some 600 public exchanges now in operation.

Public exchanges, however, won’t disappear altogether, experts say. Instead, users for spot buys and commodity purchases will likely tap them.

However, not all of them will do so, according to Tom Koulopoulos, an analyst at The Delphi Group in Boston. “Right now, B2B is an incredibly convoluted marketplace,” he said at Delphi’s business-to-business executive summit last week. “One-half of the B2B exchanges out there will go under in six months.”

Meanwhile, eMarketer Inc., a New York-based Internet research firm, reports that 93 per cent of all business-to-business commerce is presently transacted through private or so-called proprietary exchanges, many of which have generated huge and well-documented supply-chain efficiencies.

Think Bentonville, Ark.-based Wal-Mart Stores Inc. and Round Rock, Tex.-based Dell Computer Corp.

Even some public business-to-business marketplaces are embedding private exchanges within their Web sites. Inc., a seafood exchange based in Portland, Me., has what it calls a pipeline feature. The feature lets big corporate buyers like the Pleasanton, Calif.-based Safeway Inc. grocery chain do business privately on the site with preferred suppliers.

“Safeway doesn’t wake up wondering where they’ll buy shrimp,” said GoFish CEO Neal Workman. “What our model starts to morph into is what their business relationships already look like.”

Several managers at last week’s executive summit said they agreed that what’s driving the explosion in proprietary exchanges is companies’ long-standing preference to do business with tried-and-true suppliers.

Public exchanges, they said, may be a good place to make spot purchases or to buy commodity items, like paper or janitorial services, on the cheap. However, commodity items aren’t what most companies are looking for to keep their production lines rolling.

J. Tyler Welch, a materials director at Northrup Grumman Corp. in El Segundo, Calif., estimates that less than 10 per cent of the direct goods the airplane manufacturer buys are so-called standard items.

“There are very rigid specifications and huge liabilities associated with aircraft parts,” Welch said. “You can’t afford to have Radio Shack parts you bought online show up in an airplane.”

Still other companies, such as Anheuser-Busch Cos., have strict specifications on even their indirect goods. For instance, Anheuser-Busch buys palettes, which must be of a certain size and contain a certain number of screws, from prequalified vendors.

“We have unique packaging requirements, so why would we want to put them on a [public] exchange when we’ve already [got] qualified suppliers?” said Jennifer Coop, director of e-commerce at the St. Louis-based beer maker.

For now, Welch said he’s equally leery of doing business on any of the aircraft industry consortia exchanges. He said Northrup Grumman has looked into and another exchange announced by The Boeing Co. in Seattle.

“But there are costs, such as transaction costs, involved in participating,” Welch said. After poking into these things at Northrup Grumman, “we’re not finding a lot of substance, at least in our industry.”

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