Private exchanges drive B2B success

by Pimm Fox

May 8, 2001 —

Business-to-business e-commerce exchanges are getting a bum rap. Business executives say they don't live up to the hype, and vendors rattle Wall Street with lackluster earnings and sales. But this isn't the complete story. Most of this angst concerns public B2B exchanges.

For real success, look at what's going on with corporate or private B2B marketplaces. Private exchanges for major corporations such as IBM and Sikorsky Helicopter have inherent advantages that public exchanges may never acquire.

First, owners of private exchanges regulate supplier and customer access -- and exclude competitors -- making the sharing of sensitive information more likely.

Second, owners can direct suppliers and customers to use the exchange through price incentives or by mandating changes in the way to conduct business.

Third, private exchanges can be secured and tailored to serve specific projects and customers, unlike public exchanges, which must be generic so as to accommodate everyone.

For example, at Sikorsky, Darryl Toni, a senior technical structures engineer who works on the composite material that goes into the Army's Comanche helicopters, manages drawings for the airframe, landing gear and propulsion system, using a secure private exchange to cut the time and cost of documentation and drawing revisions.

"We've been able to save about 20% of our time in the structures area," Toni says. Using the private exchange and technology from Santa Clara, Calif.-based Nexprise also meant eliminating the contractual requirement to produce six volumes (at 600 pages each) of paper documentation for the Army. "It used to take 12 engineers a couple of months to produce this," a task that's now eliminated, he adds.

IBM, meanwhile, has saved about $1.7 billion since 1993 by being able to divulge sensitive price and inventory information over a private exchange built for 25,000 suppliers and customers, says Bill Paulk, IBM's vice president of e-marketplaces. As host of the exchange, the company helped defray the cost of connecting suppliers. The payoff: On-time delivery to customers soared from about 50% to close to 90%, "which helped justify the cost," Paulk says.

Public exchanges such as Cordiem, which serves the aviation industry, and the automobile industry's Covisint are stymied because competitors won't reveal proprietary information about procurement methods. Nor can exchange members be uniform in mundane-but-expensive areas such as invoicing, inventory management and documentation, forgoing even those cost savings.

AMR Research, a Boston-based researcher of e-business strategies and technologies, estimates that 20% of the cost of goods sold, or about $450 billion, can be taken out of the global supply chain by using both public and private B2B exchanges.

Although they grab headlines, industry-based exchanges will never help the bottom line, because they can't target specific customers, impose business changes on a network of suppliers or be repositories of critical company data.

But companies that create and use private exchanges can drive real business efficiencies; that's what B2B e-commerce is about.

Computerworld