Implications of B2B marketplace to supply chain development

Dawei Lu and Jiju Antony

Introduction
To date, the interfacing between businesses through digital marketplaces has come to the forefront of management attention and has been embraced with a great deal of enthusiasm. At present, a week seldom goes by without an announcement of a new B2B marketplace being established. It is estimated that there are already close to 4,000 known marketplaces worldwide, however this number varies significantly according to the source. Businesses religiously regard the digital marketplace, especially the businessto-business (B2B) marketplace, as a leverage through which they can gain real competitive advantages. Truly, there have been many varieties of Internet born business approaches such as Choice Board, collaborative manufacturing commerce (CMC) and so on developed and introduced across different industrial sectors. The B2B marketplace has evidently taken a central stage in facilitating supply chain development, and has thus been the focal point of discussion of this paper. The danger facing the business is perhaps the overheated enthusiasm. ``Many companies are still eager to jump in: during the year 2000, the total investment in B2B infrastructure exceeded $200 billion an estimated $10 billion of it for public consortia backed e-marketplaces alone'' (Agrawal and Pak, 2001). In some instances the city looks very favourably at the idea of a digital marketplace, for example, ``. . . the mere announcement that General Motors was to form a marketplace powered by technology from Commerce One caused the latter's share price to shoot up by 23 percent'' (Ramsdell, 2000). Such a passion can easily obscure the vision for its downsides and pitfalls. But, on the other hand, indifference and ignorance of the true effect of the B2B marketplace on business environment and business survival could be lethal. The purpose of this paper is to attempt a closer look at exactly what impact the B2B marketplaces have brought and can bring about for today's supply chain development. In the second section, the current status of the B2B marketplace including neutral and biased digital marketplaces are discussed, followed by the investigation of benefits and challenges brought to business in the third section. Further on, in the fourth section, some key success factors are identified for further debate. In the fifth section, the

The authors Dawei Lu and Jiju Antony are Senior Teaching Fellows at Warwick Manufacturing Group, University of Warwick, Coventry, UK. Keywords Business-to-business marketing, Supply-chain management, Electronic commerce Abstract This paper illustrates recent development of the fast advancing B2B marketplace and its impact on changing the business environment as a whole. By recognising the need to adapt to a new form of inter-organisational relationships, the issues of supply chain development, in particular, have been specifically brought to a focal point of discussion. It then moves on to identify and evaluate the benefits and challenges that face the supply chain development process, emphasising primarily on the emerging B2B marketplace's impact on supplier relationship, business competitiveness, responsiveness to the market needs and across tiers information sharing. Views on the formulation of new supply chain strategy and operational tactics have also been argued in an attempt to explore alternatives. Electronic access The Emerald Research Register for this journal is available at http://www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0954-478X.htm

The TQM Magazine Volume 15 . Number 3 . 2003 . pp. 173-179 # MCB UP Limited . ISSN 0954-478X DOI 10.1108/09544780310469271

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implication to business strategic change and legal issues are explored.The sixth section draws the conclusions and raises some further questions.

The current status of B2B marketplace

The term ``B2B marketplace'' can be defined as ``A World Wide Web site where goods and services can be bought from a wide range of suppliers'' (Ramsdell, 2000), or ``Internet based intermediaries that create new efficiencies in the supply chain, including new ways of buying, selling and brokering products and services'' (Monastero, 2001). Those definitions imply that the Internet plays a crucial role in the existence of a B2B marketplace for supply chain formation and development. The explosion in the use of the World Wide Web in the last decade or so goes some way in explaining the increased attention received by digital marketplaces. Kipola (2000) predicts that by 2005, digital marketplaces will generate over half of all online commerce revenues, dwarfing the revenues generated by all other Net commerce business models combined. Generally speaking, there are three types of digital marketplaces: (1) Marketplaces based around a specific industry sectors. (2) Marketplaces based around products and services. (3) Marketplaces focused on functions. The marketplaces based on industry revolve around a specific industry sector. From a supply chain management point of view this type of marketplace serves the supply network which targets a specific segment of market. Hence it is also called vertical marketplace. Petroleum industry is an example. Currently, there are two such marketplaces under development within the petroleum industry, Chevron's Petrocosm, which Texaco recently joined, and another one formed by Royal Dutch/Shell that recently added BP Amoco. These marketplaces have been set up to help buyers source goods and services that are largely specific to industries. The type of marketplace which is formed around a wider supply market that cuts across several industries is called horizontal marketplace. Examples include the marketplaces for maintenance, repair and operating (MRO) goods such as safety and

office supplies. MRO goods are goods that do not go directly into the finished product or process. In this case, both supply and enduser markets are tend to be very fragmented. The value of horizontal marketplaces is that they efficiently match the needs of the one with the offerings of the other. The marketplaces focusing on functions gain value from concentrating functional capabilities and quality services. For example, they help HR departments manage employee benefits; help companies dispose of excess inventory and so on. Digital marketplaces generate value through two main mechanisms: aggregation and matching. Marketplaces using the aggregation mechanism bring together a large number of buyers and sellers under one virtual roof by providing one stop shopping they reduce the transaction costs and greatly improve choices and market efficiency. An example of this mechanism is PlasticsNet.com. According to Kaplan and Sawhney (2000), PlasticsNet.com allows plastic processors to issue a single order for hundreds of plastics products sourced from a diverse set of suppliers. The prices in an aggregation mechanism are prefixed and therefore the aggregation mechanism is static in nature. The addition of an extra buyer to an aggregation-based marketplace only benefits the sellers whereas the addition of a new seller only benefits the buyers, the reason being that the positions of the buyers and the sellers are fixed. Marketplaces using the matching mechanism bring together buyers and sellers to negotiate prices on a dynamic and real time basis. The matching mechanism is ideal for spot sourcing situations, where the price of a good or service is determined at the moment of purchase. In the matching mechanism the role of buyers and sellers is very different to what it is in the aggregation mechanism; in the matching mechanism the buyers can be sellers and vice versa. The addition of a new member benefits both the buyers and the sellers and helps to increase the market's liquidity. The matching mechanism is a more powerful business model than the aggregation model but it is also more complex and much more difficult to implement. In fact, we know a supply chain has two basic functions: the physical function and market mediation function. It is not difficult to observe that the aggregation mechanism if used appropriately will in effect improve a

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The TQM Magazine Volume 15 . Number 3 . 2003 . 173-179

supply chain's physical function in terms of achieving higher efficiency and lower cost. On the other hand the matching mechanism will serve precisely in facilitating and leveraging the market mediation functions, which usually distinguish a supply chain's effectiveness and competitiveness in agility and responsiveness to fast changing markets. The leverage power of the B2B marketplace in a supply chain, however, varies depending on whether they are neutral or biased marketplaces. The issue of bias is very important in a digital marketplace. In most cases the digital marketplaces are neutral, i.e. they neither favour the buyers over the sellers nor do they favour the sellers over the buyers and in most cases a third party usually operates these neutral digital marketplaces. But one can also find marketplaces that are either biased towards the buyers or the sellers. Marketplaces that favour the sellers act as forward aggregators and operate downstream in a supply chain. Examples of organisations that use the forward aggregator model include Intel, Cisco and IBM. The forward aggregators' supply chain structure is very much like the traditional supply chain structure, where the supplier is at the start and the buyer or the customer is at the end. Biased marketplaces that favour the buyers act as reverse aggregators, where they attract a large number of small buyers on whose behalf they bargain with the suppliers. Examples of organisations that use the reverse aggregator model include GE and Boeing. Ecfood.com is another example of a B2B exchange that gives smaller purchasing buyers the clout of the big companies. Neutral marketplaces have the greatest potential to grow and be successful because they are equally attractive to both the buyers and the sellers. The major hurdle that neutral digital marketplaces face is the issue of attracting both the buyers and the sellers. Sellers will refuse to trade if they find that there are not many buyers and vice versa. Therefore, neutral marketplaces have to ensure that they can quickly attract buyers and sellers and are able to create liquidity at both ends. Neutral marketplaces have to be extremely cautious when accepting equity investments from either a large buyer or a large supplier because such investments can generate a perception of bias. Unlike neutral digital marketplaces, biased marketplaces are trading for the benefit of buyers or sellers; therefore they have a greater

chance to grow quickly compared with a neutral digital marketplace. Biased marketplaces can also focus on small buyers or sellers because they can aggregate demand or supply. According to Kaplan and Sawhney, there is another major difference between neutral and biased digital marketplaces. Neutral marketplaces tend to work better in markets that are fragmented on both the buyers and sellers side; they help to reduce the transaction costs (aggregating) and improve matching (providing liquidity); whilst biased marketplaces tend to succeed in situations where one side of the market is fragmented.

The benefits and weakness of B2B marketplaces

There are apparently many benefits to be gained by companies trading across the Internet through the digital marketplaces. By bringing together large numbers of buyers and sellers and by automating transaction processes, Web based marketplaces expand the choices available to buyers, give sellers access to new customers and in the meantime reduce transaction costs for all players. There is little doubt that the Internet borne marketplace can be a great business opportunity for suppliers, but only if they know how to interact effectively with it. Suppliers that have efficient operations and that proactively manage their products and services can reap enormous benefits from being associated with a marketplace. We can see that there are at least three main ways of creating value through B2B marketplaces: (1) B2B marketplaces expand everyone's market reach. Without B2B marketplaces, buyers can have great difficulty finding suppliers with the right parts and prices, and suppliers can equally encounter difficulties in finding motivated buyers. (2) B2B marketplaces generate lower prices for buyers. The price improvements for the buyers result from the ability of buyers to reach more suppliers or the most efficient supplier as well as from increased price competition and in some cases, access to excess inventory stocks. In effect it improves the market efficiency.

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(3) B2B marketplaces cut the cost of buyers' operations. Most B2B companies now provide services that cut the cost of B2B procurement processes, which traditionally consume much staff time and effort. Those adding value potentials to organisations as well as to a supply chain as a whole are very appealing. But, the buyers and sellers using B2B marketplaces have to ensure that they use these marketplaces wisely to further their supply chains in the long term, rather than just for a short term gain. In particular, business should not use the marketplace just to interact with the first-tier buyers and sellers, but to go beyond second or third tiers in the supply network. This wider span of overarching ability of the marketplaces should be fully taken advantage of, as it represents unique value in facilitating information flow and business integration along the supply chain. Failure to recognize that will ultimately deprive the true value that the B2B marketplace can add to the supply network development. It is however important to realise that although the benefits of B2B marketplaces to a supply chain can be enormous; nonetheless, B2B exchanges cannot affect every element of the supply chain equally. The main benefit that B2B exchanges offer to a business are the ability to improve the speed and flow of information as well as making it available more widely. Many other important issues of supply chain development still remain remote from what the B2B marketplace can offer. In particular, areas such as supplier partnership development, new product introduction, joint planning and joint cost reduction and quality improvement are hardly benefiting directly from the B2B marketplaces. Even in terms of facilitating the information flow the digital marketplaces have their limitation in that they tend to provide only commercial information rather than production and management information. Agrawal and Pak (2001) noted that although B2B marketplaces can help companies realise certain purchasing and transaction-processing benefits in the short term, broader improvements, particularly reductions in inventory, improved service levels and faster time to market are harder to achieve. Despite the attractiveness the B2B marketplace exuberates and a large influx of new marketplaces, the fate of the companies

which create and own the marketplaces varies. Most of them are yet to become economically viable businesses and many of them operate at huge losses. Recent research predicts that only one in 20 marketplace initiatives will survive the early competition, which will result in many bankruptcies, acquisitions, and mergers. It is suggested that less than half of all current European marketplaces have the revenue resources to reach critical mass. There could be a number of reasons why marketplaces fail: . A B2B exchange cannot wring huge efficiencies out of all elements of the supply chain. B2B exchanges can have no impact on certain supply chain elements such as physical flow of goods. For example, there is still need for organisations to keep surplus inventory to meet any unanticipated demand until more components arrive from the suppliers. . B2B exchanges have perpetuated certain inefficiencies by failing to realise that the same supply chain segment in different industries, and different supply chains in the same industry, may require different improvement levers. B2B exchanges have so far tried to serve all needs at once. . Organisations fear of sharing information freely, seriously inhibits value adding in a supply chain. Although the information can benefit the other members of the supply chain, the fear of losing crucial competitive advantage leads to companies owning the information refusing to share information freely. This includes information regarding forecasts, product life cycles and bills of material. The failure of many small marketplaces is also partially the direct result of emerging dominance of giant players. Evidently, there is an increasing trend towards the big giants of an industry combining to form marketplaces, which supply the parts and services for that particular industry. An example of such an alliance is that of between Boeing Lockheed Martin, Raytheon and BAE Systems which in early 2000 announced they had built a marketplace for aerospace parts and services. The big three giants of the automobile industry, Ford, General Motors and Daimler Chrysler, have also built a B2B marketplace where the parts can be exchanged in the early part of 2001. The emergence of such

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The TQM Magazine Volume 15 . Number 3 . 2003 . 173-179

marketplaces further threatens the liquidity of the smaller independent marketplaces as buyers and sellers favour the marketplaces of the bigger organisations due to the larger number of participants using their B2B exchanges. The emergence of such B2B marketplaces also threatens to squeeze the profit margins of the suppliers.

Views on the critical success factors

No matter what kind of marketplace one is focusing on, there are certain core elements or factors that determine the success or failure in a marketplace. Five factors have been identified by Ramsdell (2000) as critical to the success of a B2B marketplace. They are: (1) Early liquidity. The businesses that have the best chance of succeeding are those with the greatest liquidity. If there are a large number of buyers trading on a marketplace then this will attract more suppliers. Strong buyers can also force suppliers to join them in the marketplace. By attracting large numbers of buyers and suppliers, a marketplace can become very strong and strong marketplaces can endeavour to bring as much buying volume on-line as quickly as possible. (2) The right owners. The companies that bring liquidity to a marketplace are logically its founding partners and they have the greatest opportunity to capture the value it creates in the form of lower prices for the goods and services purchased through it. For the intermediaries firm that match-up the buyers to the sellers, if they cannot readily generate liquidity then they can find that they lose buyers and sellers from their marketplaces. (3) The right governance. It is vital for a marketplace to have a good management structure governing them to ensure impartiality to buyers and sellers particularly in multi-buyer marketplaces. Management needs to ensure that the buyers are clear with regards to the terms of their involvement and that they commit themselves to supply liquidity. (4) Openness. A marketplace needs to operate under very open conditions in order to attract as much buying and selling as possible. By attracting good numbers of

buyers and sellers a marketplace can go some way to ensuring liquidity. (5) A full range of services. Building marketplaces with only a view to pushing down prices will no longer ensure competitive advantage in the long-term. Marketplace architects have to look at providing additional services related to the supply chain such as the management of customer relations, fulfillment logistics and monitoring of supplier performances. Here, we would argue that the first factor of ``early liquidity'' in fact should not be viewed as a fundamental causal factor for the success or failure of the marketplaces, but rather the result of the design, planning, implementation and managing of the marketplaces. The length of moving into strong liquidity is a controllable factor, which in itself alone can not determine or measure the success or failure of the marketplaces. The second success factor of ``the right owners'' has not been defined clearly, as to which characteristics of an organization or individual constitute ``the right owners''. We believe, depending on different industrial sectors and market environment at a particular moment of time, the owners of the market place can take a variety of shapes and have diverse characteristics. The ``right'' ones may well be non-existent. The openness and full range of services are indeed the critical factors from a supply chain development perspective. The trend of supply chain development during the last decade has demonstrated that progressively the information flow is set to displace inventory flow. In other words, gradually improved information flow along the supply chain will improve the supply chain visibility and market responsiveness and consequently squeeze out excessive inventories in the supply chain. Here, the openness of the marketplace determines whether it helps or not. Marketplaces clogged with mere commercial information provide no constructive value to supply chain development. Full range of services as a critical factor must extend services to those areas which will facilitate vertical transparency and linkage in a supply chain. Services restricted in one layer of interfacing between buyers and suppliers will again have very limited contribution to make to the whole supply chain.

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Implications for corporate strategy and legal issues

.

As discussed above, the underlying business process is undergoing a fundamental change due to wide spread up-take of Web-based solutions for business-to-business transactions as well as collaborations. The impact of the B2B marketplace in particular on large or small business has not been confined to the operations level but has far-reaching implications in corporate strategy formulation. The supply chain networks established over many years have been disturbed and have embarked on a new phase of reconstruction. Surely, not all the business will end up with stronger competitive position through the process. Such an uncertainty of business direction and long-term competitiveness will have to be dealt with through careful but swift strategic repositioning. Some arguments which can be developed are: . B2B marketplace facilitates supply chain's market mediation function, thus will make the supply chain more effective and responsive to the changes of market needs. Therefore, it will become more desirable for organisations to formulate much more flexible and responsive business strategies than ever before in order to remain competitive in the marketplace. . B2B marketplace also improves the horizontal transparency and visibility between the firms in the same business sector. The cost and value advantages of each business become more exposed to the rest. Those areas of head-oncompetition within the sector are easily exposed and likely to be intensified. This will inevitably give rise to more differentiated and diversified strategies to resolve the competition, i.e. firms will have to reposition their strategies from perhaps a cost/price advantaged one to a focused or differentiated ones. This will ultimately reshape the value stream and re-allocate the profit share within the network. . B2B marketplace will enlarge the scope of horizontal networking contact for the businesses involved. Over duplication that was not noticed before may have to be axed. More outsourcing and ruthless focus on core competencies could be more appropriate strategies. This will consequently result in more diverse

specialisation and stepped-up interdependence between firms. Strategies of supplier relationship may have to be re-addressed. It may eventually shake the foundation of lean supply or partnership model (Lamming, 1993), giving rise to the question of whether the permanent partnership to a few is, after all, necessary with the suppliers' marketplace becoming much more fragmented and readily accessible. In the meantime, one should not rule out the possibility that some key strategic partners may not be affected by the advent of the marketplace, or even be favourably strengthened.

In parallel with strategic issues, the movements towards developing electronic business tools such as the B2B marketplace has increasingly and will almost inevitably face a number of legal challenges. These issues can relate to data protection and privacy, security and authentication, customs and taxation, contractual matters such as liabilities and evidence issues, intellectual and industrial property rights etc. Unfortunately, there are no straightforward solutions to this problem. Technological mechanisms are being developed and implemented to prevent unauthorised use of digital copyrighted information, but such mechanisms must comply with the legal environment in which they will operate, often not adapted to what the technology can do. Furthermore, the diversity of the legal environments makes it difficult, if not impossible, to implement such applications at a global level. This adds to the existing difficulty of defining ``interoperable'' and ``compatible'' technical systems enabling global services in the global information society. The advent of the B2B marketplace as a trading medium has caught many organisations off-guard and has resulted in a plethora of claims and counter-claims over the use of this most capricious of media. The problem for many organisations will be in attempting to police a global medium where laws change from place to place and country to country.

Conclusions
The advances made in the information technology over the last five years have been

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tremendous and many Web-based organization-to-organization information and transactional systems have emerged as a result, in which the B2B marketplace stands prominent and attracts a great deal of attention across industrial sectors. Organizations can no longer afford to stand still and ignore these technologies in their supply chain development. However, the success and substantial benefit of B2B marketplaces are yet to been seen. Companies should not let the hype and excitement of the new phenomenon obscure the true needs of their business. The promise of the marketplaces is rather seductive, but the real benefits for supply chain efficiency and effectiveness can only be gained from the extended reach of the marketplaces with richness of information as well as openness vertically across the supply chain. Effective strategy towards the adoption B2B marketplace in supply chain formation needs to be based on a good understanding of the costs and benefits. However, identifying and measuring these benefits will not be straightforward. The cost of mistiming the introduction of relevant e-commerce based solutions to support the B2B marketplace supply chain development, or any over/under using of these technologies can be very high. Consequently, developing and implementing appropriate strategy will be important for maintaining competitiveness. Legal matters in today's digitalized business will have to be treated case-by-case, as a unified legal framework is, however seemingly attractive, practically non-existent. Businesses intendingto forge buyer-supplier relationships through the B2B marketplace should consider having less reliance on contractual trust but more on good-will trust. Critics might argue that there is really nothing new about what a B2B marketplace can bring about for the supply chain development. The ideas of better information flow and supply chain integration or lean supply were already there for some time. However, what one may fail to see is that the B2B marketplace as the critical enabler has, in a way, given a new lease of life for these ``old'' ideas and galvanised them to deliver the extra miles over and above what we could originally anticipate. Of course, the extent of real gain from B2B marketplaces for the supply chain as a whole is after all yet to be unfolded.

References
Agrawal, M.K. and Pak, M.H. (2001), ``Getting smart about supply chain management'' The McKinsey Quarterly, No. 2, pp. 22-5 Kaplan, S. and Sawhney, M. (2000), ``E-hubs: the new B2B marketplaces'', Harvard Business Review, May-June, pp. 98-101. Kipola, T. (2000), ``Digital marketplaces'', The Industry Standard Magazine, February. Lamming, R. (1993), Beyond Partnership Strategies for Innovation and Lean Supply, Prentice-Hall, London. Monastero, J. (2001), ``Digital marketplaces: private vs public'', Supply Chain Technology News, May. Ramsdell, G. (2000), ``The real business of B2B'', The McKinsey Quarterly, No. 3, pp. 175-6.

Further reading
Berryman, K. and Heck, S. (2001), ``Is the third time the charm for B2B?'', The McKinsey Quarterly, No. 2, On-Line Tactics, pp. 20-4 Clark, T.H. and Lee, H.G. (2000), ``Performance, interdependence and coordination in business-tobusiness electronic commerce and supply chain management'', Information Technology and Management, Vol. 1, pp. 85-105. Kalakota, R. and Whinston, A.B. (1996), Frontiers of Electronic Commerce, Addison-Wesley Publishing, London. Kerrigan, R., Roegner, E.V., Swinford, D.D. and Zawada, C.C. (2001), ``B2B basics'', The McKinsey Quarterly, No. 1, p. 46. Land, J. (2000), ``B2B exchanges: industry heavyweights push aside little guys'', Red Herring Magazine, 28 March, available at: www.redherring.com Pawar, K.S. and Driva, H. (2000), ``Electronic trading in the supply chain: a holistic implementation framework'', Logistics and Information Management, Vol. 13 No. 4, pp. 21-32. Plyler, A. (2001), ``The trading exchange revolutionising A&D'', Ascet, Vol. 3, 15 April 2001, available at: www.ascet.com/documents.asp?d_ID=459 Porter, M.E. (2001), ``Strategy and the Internet'', Harvard Business Review, March, p. 70. Pyke, D. (2000), ``Matching B2B e-commerce to supply chain strategy'', Supply Chain Management Review, Special Global Supplement, July/August. Shenf, M.H. (2000), Protocols for Secure Electronic Commerce, CRC Press, London. Strader, T.J., Lin, F. and Shaw, M.J. (1999), ``Business-tobusiness electronic commerce and convergent assembly supply chain management'', Journal of Information Management, Vol. 14, pp. 361-73 Turban, E., King, D., Lee, J. and Chung, H.M. (2000), Electronic Commerce 2002: A Managerial Perspective, Prentice-Hall, London. Yamada, K. (2001), ``B2B not what it's supposed to be'', Red Herring Magazine, April, pp. 25-8

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