Building A Full-Bodied Exchange

Since online exchanges have discovered that important value-adds include dynamic pricing and online negotiations, one wine exchange's multiple auction formats supplement or replace long-term contracts with a forward market.



In the short span of a year, the builders of Net markets have come to realize that disintermediation, the elimination of the middleman, isn't always possible or even desirable. Jin Whang, associate director of the Stanford Global Supply Chain Management Forum, writes in the forum's fall 2000 newsletter that reintermediation recognizes the need to combine information technology with the specialized information that makes traditional middlemen valuable.


Old Traditions, New Rules


The wine industry has no choice but to follow this path. Congress last year upheld legislation that allows state attorneys general to continue to restrict the interstate shipment of alcoholic beverages to consumers, which, in effect, preserves the status quo. For the foreseeable future, the wine industry's three-tiered supply chain of wineries, wholesale distributors and retailers will remain intact. As a result, relationships built over generations are as valuable as ever, particularly in such a close-knit, family-oriented business. It's no coincidence that WineryExchange's roots run deep in the California wine country. CEO Peter Byck was raised in Sonoma County, and his family owns Paradise Ridge Winery. Bill Narlock, managing director for Asia, is still actively involved in his family's winery, which was founded by his great-grandfather Anton Nichelini, a California wine industry pioneer. Joe Ciatti's grandfather, Giuseppe Bagnani, started Geyser Peak in 1937, a heritage that links the exchange to the wineries that supply Ciatti with 110 million gallons of bulk wine and other wine grape products a year.


Mei-lin Cheng, chief technology officer for WineryExchange, readily admits that she's not a Farmer. The Stanford graduate is a 25 year veteran of Hewlett-Packard, where she managed the re-engineering of the HP supply chain for order fulfillment. To Cheng, the job of balancing technology and the wine industry's high-touch tradition is a change management process. Any time you introduce a new technology that can be taken advantage of in a business that's age-old you're always going to have an adoption rate hurdle, she says. I would hope that, further down the road, folks who are steeped in the traditional way of doing things seize the Net and realize the advantages.


One of the advantages is the information. If you provide relevant content, it's a way to get folks to adopt your site as an integral part of their daily life. I think companies can succeed if they stay closer to what their customers want, Cheng says. The information they get at the portal is substantial daily market price reports, grape tonnage and availability, Gomberg's top-flight analysis, import/export statistics, and a forum in which users ask questions of the company's wine experts and join discussions.


The most important advantage, however, is improved price discovery. LiveExchange's multiple auction formats supplement or replace long-term contracts with a forward market, which WineryExchange expects will reduce price volatility, increase annual sales transactions, and give both growers and wineries more flexibility in contract management. The auction software can be customized to incorporate all the necessary contract parameters into participants' auction sites in order to work with one or many trading partners. Says Arnold Waldstein, Moai's vice president of marketing and strategic alliances, WineryExchange must deal with a whole level of things that go beyond price availability at certain times, the cost of shipping, the quality [and variety] of the grapes, transportation, batch inspections. After buyers have hammered out detailed quotes they can then track contract amendments through each of stage of a negotiation.


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