Still in the market

Remember e-marketplaces, those Web portals where buyers and suppliers would find each other and then transact business electronically? E-markets were supposed to revolutionize procurement and supply chain management and deliver enormous cost benefits. Yet the term today is all but obsolete. Worse,

to many it’s a sour reminder of the bad old, over-hyped, pre dot-bomb days.

“”I think public e-markets failed completely,”” says Toronto-based management consultant Ron Babin, a partner with Accenture.

“”I say that with all sorts of caveats, but companies like Covisint and many others like it have gone out of business. It’s very clear they were not successful.””

Covisint, launched four years ago by the big three North American auto makers, was an e-market standard bearer. With its decline and dismemberment last year, public e-markets it seemed became officially another failed e-idea.

But are they?

Don’t tell that to the thousands of users of Global Wine & Spirits, an e-market founded and operated by Mediagrif Interactive Technologies Inc., a profitable Montreal-based e-commerce services company. (That’s right, profitable.)

Or Pantellos, a still-thriving marketplace for the U.S. energy utilities industry. Or Quadrem International in the chemical industry. Or Aeroxchange, a successful airline industry e-market co-founded by Air Canada. They don’t know yet about e-markets being dead.

Aeroxchange is an interesting case. Not many things have gone well for Air Canada lately, but Aeroxchange is one that has.

For example, Air Canada recently participated in a reverse auction — in which suppliers bid down their prices to win business — at the site with other airlines. This one was for generic aircraft hardware — nuts, bolts, clamps and the like.

Harry Hall, the airline’s senior director of supply chain management, figures Air Canada saved 40 per cent over using conventional procurement practices.

“”We were just blown over by it, to tell you the truth,”” Hall says.

Reverse auctions, often held up as a major benefit of e-markets and e-procurement in general, have not always been popular with suppliers. Many see them as a mechanism for squeezing margins, which no doubt they are. But successful e-markets like Aeroxchange generate enough value for sellers to overcome their misgivings.

“”We’re trading-partner-neutral,”” is how Aeroxchange president and CEO Al Koszarek puts it — perhaps an exaggeration, since the principal investors in the company are the 13 airlines that started it in 2000.

Still, enough suppliers — thousands, according to Koszarek — see enough benefits, including in some cases the buying tools to support their own businesses, that Aeroxchange has been able to grow the number

of suppliers participating and, more importantly, transaction volumes by “”hundreds of per cent”” a year since launching.

“”For an exchange to be successful,”” notes Mediagrif chairman and CEO Denis Gadbois, “”you don’t need to provide equal value to all, but you do need to provide some value to everyone. You have to make sure nobody is a loser.””

For buyers like Air Canada, savings on procurement using reverse auctions and other Web-based tools are just the tip of the benefits iceberg.

Being able to order from suppliers electronically through Aeroxchange, with Aeroxchange handling all the troublesome translating and integration between two disparate computer systems, has improved productivity among Air Canada buyers by 20 to 25 per cent, Hall claims.

“”And in our current situation, with the restructuring, we’ve had to radically downsize the operation,”” he notes. “”So we have to find ways to do a lot more work with same amount of people.””

Aeroxchange also facilitates the automation of invoicing. Air Canada’s systems can in many cases process electronic invoices without human intervention as long as they match the stored purchase order and record of receipt.

Today, suppliers tender 20 to 30 per cent of invoices electronically. Air Canada hopes to get that up to 70 to 80 per cent. “”It will save us a tremendous amount of manpower — and mistakes,”” Hall says. “”We’ll probably be 50 to 60 per cent more efficient.””

Aeroxchange has continually added new tools. It is now doing for aircraft repairs and aircraft parts repairs what it did for parts procurement — giving buyers worldwide visibility of potential suppliers and automating requests for quote, purchase order and invoicing processes.

Perhaps the most astonishing function of Aeroxchange is the tool that allows airlines to view fellow members’ parts inventories online.

If Air Canada has a plane grounded in Frankfurt because it needs a repair but the airline doesn’t have the part, it can go on Aeroxchange, find out that Lufthansa has the part in stock at Frankfurt, and automatically generate a request for loan.

The possibility of reducing inventory is one of the strongest allures of e-markets like Aeroxchange. It’s not so much the possibility of borrowing parts on short notice — that simply wouldn’t work in most industries — but having real-time visibility of what suppliers have available.

“”In the airline industry, we really don’t have a smooth consumption on parts,”” Hall explains. “”That means the planning process needs to be very, very tight. Holding too much or not having enough can hurt you dramatically.””

Aeroxchange is not an isolated case. Gadbois claims there are 200 to 300 working e-markets — he calls them exchanges — worldwide. Not all are making money, but some, such as, an aerospace, marine

and aviation industry exchange, are generating transaction volumes in the tens of millions of dollars. A few, like Mediagrif’s Broker Forum, generate even more.

Broker Forum, launched in 1996, lets electronic parts brokers, distribu-tors and dealers buy and sell from each other online.

Unlike the more familiar Aeroxchange model of e-market, all Broker Forum members are buyers and sellers, and end customers are not allowed. It generated more than $5 billion (US) in transactions in its last fiscal year.

“”If you’re a dealer, broker or distributor, you have to be there,”” Gadbois observes. It’s an enviable position for the e-market operator.

Mediagrif is building other e-markets. Global Wine & Spirits, heavily backed by the Quebec Liquor Board, links 2,500 wine and spirits suppliers and 1,200 importers around the world. Even tiny Mom and Pop vineyards in Italy are on it. Members generate $800 million in transactions a year.

So if e-markets can work sometimes in some industries, why did so many fail? Can e-markets make a comeback? And if so, is there a prescription for success?

Why Covisint failed is a matter of some contention. For Gadbois, it’s simple: Covisint didn’t provide enough value to suppliers.

“”They said, ‘You should join, and you have to pay for the technology, and oh, by the way, we’re expecting you to cut your margins by one or two per cent, too.’ It’s a no-win situation.””

Andrew Bartels, a research analyst at Forrester Research, says it’s not that simple.

The auto companies, like other industry consortia that started e-markets, were motivated in part by fear, he contends. They were afraid eBay, or something like it, could grow to be a de facto monopoly provider of e-procurement and e-sourcing services.

“”They said, ‘If there’s going to be an eBay in our marketplace, we want to own it,'”” Bartels says. “”But then the fear dissipated and they realized they’d been scared by a bogey, that this wasn’t reasonable.””

They also found they didn’t like having to do procurement in a standardized way, dictated by Covisint. They didn’t like the lack of privacy in their transactions. And they finally realized, Bartels says, that they didn’t need Covisint.

“”So you started seeing companies sneaking off doing [procurement] events separately because they just didn’t want to run it through Covisint,”” Bartels says.

E-markets work best, Bartels and Gadbois agree, where there is a lot of fragmentation in the industry — and, Gadbois adds, where the distribution chain is complex and expensive.

In those cases, the global visibility of suppliers and buyers that the Internet provides, and the efficiencies of online sourcing and procurement, carry enormous value.

The North American auto industry, Bartels suggests, was not fertile ground because it’s dominated by the Big 3. The e-marketplace model works better in industries with enough companies big enough to “”set the pace”” in using the e-market, but none so big they can do without it.

Gadbois stresses that e-markets must provide value to all. And it’s up to the operator to, as he puts it, “”develop the consumption habit”” — encourage members to actually use the marketplace. They won’t necessarily come just because you build it.

Mediagrif monitors use of its exchanges and calls members to point out buying and selling opportunities they’re missing.

Can e-markets make a comeback in industries where they were tried and failed?

“”I think it’s certainly possible,”” Bartels says. The fact that some, like Aeroxchange and GW&S, have survived and thrived “”is an indication that the concept has at least some validity.””

But e-markets aren’t just a concept. They also have to be well-thought out businesses. And as with any business, execution is key.

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