The shortest distance in the supply chain today is no longer along a straight line. In fact, say the authors, suppliers and participants in any supply chain today must adapt to the supply chain of today – Net Markets. Of course there is a particular Net market behavior, and as the authors describe it, it becomes clear that companies can either transform themselves or not. Those that choose to remain the same and not adapt will soon fade into history.
Today’s digital economy is transforming relatively simply traditional supply chains into something far more complex—interconnected on-line trading networks called “Net markets.” Navigating these new trading ecosystems requires a particular mix of business acumen, natural prudence and entrepreneurial courage.
Net markets today form a dense, tangled forest of competing opportunities and confusing alternatives in which start-up dot-coms have devoured their larger, more established competitors. In large markets and small, the simple rules that governed the traditional supply chain are being replaced by a complex Web that is changing the relationships between value-chain partners. Today, there is a new bottom line: The shortest distance in supply chains no longer follows a straight line.
Welcome to the wild world of Net markets, where multiple connections and multiple participants are sparking a quantum leap forward in supply-chain operations. Net markets, such as the Royal Bank’s TradeMC, the WorldWide Retail Exchange, the auto industry’s Covisint or the food and beverage industry’s Transora, aim to become 500-pound gorillas that rule the forest. For business leaders, allying with the right Net markets and the right Net-market strategy may make all the difference between becoming the king of the jungle or Darwinian debris.
Net markets have found a ready place to grow where old supply chains contained high levels of inefficiency and fragmentation. A Net market’s initial function is to replace those inefficiencies (such as inexact pricing in immature markets or high transaction costs in mature ones) with value for all participants.
The first task in any Net market is to create market liquidity by establishing a critical mass of buyers and sellers. This is no easy task. It is not enough to simply attract members to the ecosystem. They must also generate sufficient transaction volume to ensure continuous bidding, offers and completed transaction. Achieving these goals requires the proper incentives to trade: It is a balancing act that involves pricing, value-added services, fulfilment and technological integration.
Once liquidity is established, the forces of an efficient mature market will accelerate. Prices will become more competitive. Transaction costs will fall. Capable participants will enjoy information-based efficiencies. Operations with non-competitive cost structures will be forced to consolidate or exit as the pricing pressures hit their margins.
As Net markets evolve, they will move beyond merely increasing the efficiency of transactions to building value-added capabilities and services. Shared marketplaces services in warehousing, transportation, customer service, product design and others will emerge. New marketplace may sprout up that specialize in focused functional roles. Eventually, business will interact with several Net markets at various points in their supply chains.
These multiple interactions with Net markets will require a massive shift in the corporate mindset. It is tempting to view Net markets as simply a replacement for the current supply-side structure of the supply chain. But Net markets focus on inefficiencies and opportunities throughout the supply chain as they unbundle products and services, and create or capture value wherever it is found. Flexibility and adaptability will be key factors as the linear supply chain evolves into a multidimensional ecosystem, creating new, more dynamic relationships between participants. As these ecosystems evolve, relationships with suppliers and customers will dramatically change and, in some cases, business models will be radically altered.
SEIZING THE ADVANTAGE
How do companies position themselves to take advantage of Net markets? Marketplaces can open a window to a “behind the scenes” look at pricing, costs and effectiveness of operations of your partners, competitors and your own organization. Potential suppliers for the auto industry’s Covisint, for example, are concerned that their pricing may be visible to other Net-market customers. This is a reminder that before jumping in, a business must consider what it hopes to achieve by participating, and the role that it hopes to play in the marketplace.
On the buy side, reducing the cost of indirect (and some direct) purchases is the primary objective in most marketplaces today. Aggregate purchasing power and supplier leverage can reduce costs by 15 percent or more. But remember that this is a starting point. As markets mature, most competitors will have similar supply costs. Early movers may be able to gain a temporary cost advantage, but they should not expect to realize a sustainable competitive edge.
A reduction in transaction costs is another common reason for early participation in a Net marketplace. Transaction costs associated with purchases often exceed $100 per transaction, while electronic transactions cost only a few dollars.
While cost reduction may provide some quick savings, the real benefit of early participation in Net marketplaces is the learning experience. The insider’s view of the market and its impact on operations provides a good snapshot of the internal changes required to fully realize the opportunities of a marketplace.
AN EVOLVING MODEL
Buying through a Net market can have negative consequences as well. In on-line markets, suppliers may offer better deals. But will they prove as reliable as traditional partners? Delays in supply may shut down production. Poor supply quality may affect end-product quality. Downward pressure on prices may invite supplier retaliation through reverse auctions or unbundling of services. If pricing on the Net market is variable, profits may be as well.
Problems may also arise as strategic control for market decisions moves from the tight, company-centric linear supply chain to the independent, evolving ecosystem of the Net market. Entering a marketplace involves trading the current competitive structure for one seat among the many at the Net-market table. The competitive advantage of a unique supply chain with proprietary relationships and integrated links to suppliers may erode as the marketplace begins to exert control over transactions, information and relationships.
Over time, additional players will join the marketplace, changing the dynamics among the participants, suppliers and buyers. How will the marketplace ensure smooth operations during growth and transition? A Net-market governance model that includes rules for accepting new participants and defines all parties’ operating responsibilities and methods for resolving disputes is essential. Establishing common expectations for operating and expanding, as well as planning for problems and miscommunication, will be critical to the growth of the marketplace and the retention of its participants.
The dynamics of a Net-market business model are more complex. There are more players, more interaction, more information—and less ability to develop or protect a unique, strategic supply-chain advantage. Companies should be certain that the benefits outweigh the costs before they jump in the game.
Careful consideration of objectives is even more critical on the sell side of the broader supply chain. Marketplace pricing mechanisms and the ability to control prices by type of customer vary widely. Companies that closely manage their pricing may be shocked to find it administered under the auspices of the Net marketplace. Downward shifts in pricing may be difficult to reverse and, what is more, selling products to new customers may increase support costs. If prices were to rise (as is possible in a constrained supply market), others may enter the Net market with new capacity. For businesses that now have a competitive advantage selling through a Net market may actually damage profitability, customer relationships and market share.
Over the last several years, business models have been modified to focus on value. Many firms have transformed their supply chain and information systems by adding ERP systems and process reengineering. The next natural progression is to extend those supply-chain capabilities to a broader set of customers and suppliers in a Net market. The information gained from this extended participation can improve forecasting, supply and demand management, and result in more efficient operations. That, however, may not be enough. In a Net market, companies are merely one component of a larger ecosystem. The ecosystem will continue to develop, fostering innovation and eradicating inefficiencies. Leaders will move beyond the linear supply-chain model and learn to adapt as new forms of competition, partnerships and relationships continue to transform themselves.
MAKING A MOVE
Before deciding to participate in a Net market, business leaders need to determine whether their company is willing (and able) to make the adjustments to maximize their participation. The companies that will realize the greatest benefit will be those that realign their business-process and information-technology infrastructure, build and maintain relationships with buyers and suppliers through the Net market, an make changes to their legacy systems.
Industry structure is also a consideration. Net markets either intermediate or reintermediate the marketplace (replacing previously existing intermediaries). Suppliers dealing directly with Ford, GM and DaimlerChrysler will do business in the future either with or through Covisint. The chemicals Net market, eFodia.com, has developed a new business model that brings distribution capabilities to a Net market.
If participation in a Net market appears to be the appropriate choice, the Net-market maker’s understanding of your market will be critical, especially for buyers of direct production materials. Consider, for example, how complicated it is to buy the components needed to manufacture a computer monitor. Finding the appropriate suppliers is only the beginning. Each component must be compatible with all others, it must be of the desired quality and it must be available when needed. Further, it must be delivered on time; having just one component unavailable can bring the production line to a screeching halt. These are just a few of the issues, but enough to illustrate the importance of the Net-market maker’s intimate knowledge of each industry’s processes and needs.
Does the Net-market maker successfully balance neutrality and liquidity? Is it the early market leader in an industry where a head start makes a big difference? Can it successfully partner with others in the distribution channel, such as distributors and logistics providers? Does it have sufficient knowledge of both the industry and the technology? The answers to such questions will determine the Net market’s long-term viability.
Although the pure-play Net markets were the first to take the world by storm, Net markets created by bricks-and-mortar companies are dominating the second wave. The size of an established company can be an asset or a liability in building a new Net market. For instance, the Big Three automakers combined are a force to be reckoned with; their suppliers have little choice but to participate in their venture. At the same time, if the “big company” mentality pervades a Net-market maker, the decision-making process becomes more cumbersome. When GM, Ford and DaimlerChrysler decided to work together, they each brought their own technology partner to the table. As a result, they now face the complex task of integrating three technology solutions into one Net market.
The Big Three automakers also face another common concern: Where competitors converge the U.S. Justice Department and Federal Trade Commission (FTC) and other similar governmental organizations can’t be far behind. Recent approval in the U.S. and Germany doesn’t mean that Covisint will escape scrutiny. In the recent past, the agencies have begun to examine and publicly comment on the role of e-business in the marketplace. In Canada, our view is that cross-industry Net markets won’t contravene Federal Competition Bureau guidelines. Industry or vertical markets need to tread carefully, however.
How does a company gain the efficiencies of a marketplace and not cross paths with governmental regulators? Avoiding “anticompetitive harm” is the key. Competitors cannot use a marketplace to fix prices or output, rig bids, or share or divide markets by allocating customers, suppliers, territories, or lines of commerce. These agreements are per se illegal and would be challenged. Beyond per se illegal agreements, antitrust is judged by a “rule of reason.” The rule of reason would focus on how a marketplace might harm the state of competition compared to the environment without the marketplace. A good starting point for ensuring a competitive environment is to develop a marketplace with independent governance and one that can safeguard sensitive information.
Information is the lifeblood of the Net-market environment—and a cause of regulatory concern. Information within the marketplace will provide insights into competitor pricing, market positions and customers. If it is freely available to participants, it could be used to thwart competition. Markets that manage the availability of information to participants can ensure that independent decisions are made on pricing and output.
Finally, in the United States, the FTC has provided safety zones to help companies navigate the often-confusing rules of antitrust. If the market share of the collaboration and its participants accounts for no more than 20 percent of each relevant market in which competition may be affected, the agencies typically will not challenge competitor collaboration. This guideline is consistent with the Canadian Competition Bureau. However, the regulators’ perspective is evolving. The agencies are likely to move with caution so as not to dampen the promises of benefits and efficiencies that marketplaces bring. Still, Net markets must ensure that there is competition lest they attract the watchful eye of government regulators.
Net markets are developing for nearly every need. They promise cost savings, transactional efficiencies and, most important, new sources of value creation for companies. But full benefits will require sweeping change. Business models will change, as will supply chains.
Participating in a Net market is a strategic decision with far-reaching implications for businesses. While the opportunity may be compelling, the negative consequences cannot be overlooked. Developing a successful Net-marketplace plan is based upon understanding three factors: the marketplace, the strategic imperative and the Net-market maker strategy. The key to success in the new electronic marketplace is developing a strategy that is aligned with the Net-market maker.
Net markets will evolve, and as they do, so will competitors, customers and the regulatory environment. Companies that adapt and prepare to change with the environment will be best positioned to thrive. Those that ignore the transformation of the environment will fade into history as value shifts to those with prepared strategies, technologies and processes.