B2B Exchanges Flop

Article Courtesy Eye4Auto.com

There are B2B Lessons to be Learned from the Auto Industry B2B exchanges have been expected to alter conventional buyer-supplier relationships, evidence

There has been a shift from specialised public exchanges towards large industry-wide exchanges run by consortia of incumbent firms. In their paper, part of a forthcoming book entitled ‘The Global Internet Economy’ edited by Wharton management professor Bruce Kogut, the researchers argue that B2B will be ‘evolutionary’ rather than ‘revolutionary’ it will continue to be used, but in a way that enhances, not replace, individual companies’ business strategies.

John Paul MacDuffie, Wharton management professor comments: "There are patterns of social interaction that are deeply imbedded in systems of procurement. The patterns differ by company history, country, laws, institutions, geography and resources. They aren’t easily overturned in some wonderful convergent vision, and their role in influencing the adoption of a new technology is often underestimated. They influence the way any given firm would want to use the Internet." MacDuffie went on to say: "a lot of what the Internet and B2B do is reduce information and co-ordination costs. That’s a benefit that can absorb whatever kind of past approach to procurement and supplier relations you’ve had. So B2B doesn’t give you a strong incentive to move away from your traditional capability; in fact, it lets you realise some gains right away from sticking to your knitting."

Focusing on the Auto Industry, as an example of the impact of B2B on global industries and national economies ways in which B2B can facilitate a wide range of business interactions can be explored. MacDuffie has said that the savings involved, some driving one-time gains, some facilitating continuing improvement should fuel the diffusion of B2B in the coming years. Five potential sources of improvement have been suggested:

Automating the procurement process Interoperability: the Internet has facilitated easy communication between many users Online auctions have potential to reduce prices, as large numbers of suppliers compete for the same contracts Collaborative planning Collaborative design. These benefits can be shown in the auto industry’s existing behaviours towards suppliers. The U.S has largely been characterised by ‘Exit’ relationships, whereas the Japanese industry by ‘Voice’ relationships. Exit mode – automakers resolve problems with a supplier by getting a new one, Voice mode – automakers work with a long-time supplier to work out the problems. B2B can facilitate either approach.

Susan Helper, Professor of economics at Case Western Reserve University comments: "If you want to be free to choose any supplier you want, and switch suppliers at a moment’s notice, then B2B helps you do that, through auctions. If you want to develop close relations with suppliers and exchange proprietary data, B2B makes that more efficient too," Helper goes on to say: "B2B can help facilitate the voice mode on the design side, but there is a need for trust. People worry that their intellectual property is going to appear in someone else’s hands. So if you have had an exit relationship with a supplier it will be harder for you to use these collaborative tools. On other hand, if you have already built a collaborative relationship, then the benefits of being able to share designs on the web and have suppliers around the world mark up each others’ designs are quite high."

Covisint provides with a specific B2B model to consider. Convisint’s progress has been impressive, considering the disappointing performance of many B2B exchanges today. In the first six months of 2001, Convisint manages transactions worth more than $33 billion, and the equity partners are seeing the results from their investments. MacDuffie and Helper have suggested that unless Convisint can support both the exit and voice modes they may face being dominated by some automakers and shunned by others.

The advantages of the B2B consortia approach is not just for the automotive industry, but for others as well, including guaranteed source of transactions, financial liquidity, and ability to work towards standards that facilitate interoperability. Industry consortia exchanges are increasingly providing genuine cost savings through automation and standardisation. While the consortia are working to develop software and persuade trading partners they can handle the intellectual property issues, some companies are gravitating towards the idea of private B2B exchanges between themselves and their supply chain and design partners. The software companies that write the code used by the B2B exchange are among the authors of B2B’s future.

MacDuffie has suggested that insufficient knowledge of the industry being served has brought down the start-up B2B exchanges, he went on to comment: "Many people have been saying the next stage of the Internet will require the combination of deep industry knowledge with IT and Internet capabilities. Neither by itself is likely to be successful."