Net Markets: So How's It Going?

Time flies when you're in a revolution. It's been just a few years since a few pioneering players launched electronic marketplaces with the potential to dramatically alter the way business transactions are done. Since then, there's been an explosion of new entrants, from dot-com startups to major consortia of industry heavyweights.

But how are Net markets really performing? What do the buyers, sellers and industry analysts think about them? Where is the activity strongest? Here's what our reports from the front reveal about the successes and problems participants are encountering.

Well, I Haven't Spent My Purchasing Dollars on Net Markets ... Yet.

Lesson one we've learned hasn't been that easy for participants. When it comes to overall activity, there's less than meets the eye. Fact is, despite all the hoopla, buyers haven't actually spent a lot of money on purchases made through electronic markets. This year just 13.5 percent of the total $400 billion in total online sales was from Net market activity, according to Steven Kafka, an analyst with Forrester Research, a market research firm in Cambridge, Mass. But, that should change. In just four years, he predicts e-market activity will grow to 53 percent of $2.7 trillion in total online trade. In fact, a recent Forrester study found that while major corporate buyers are reporting only moderate Net market usage today they plan to more than quintuple their online purchases by 2002.

For now, most of the action has been in a few areas: volatile industries, where buyers and sellers need a smoother way to trade, and fragmented markets, where participants want a better method for connecting at a low cost. Ken Scott, facilities manager for Telik, a biotechnology firm in South San Francisco, is a good example. Researchers at the company now buy some of their supplies directly through Chemdex.com, where they're able to find products from a variety of highly specialized suppliers selling sophisticated items aimed at everyone from molecular biologists to medicinal chemists. Buyers had to go through dozens of catalogs from dozens of suppliers before, he says.

I'm Testing the Waters

What are they buying? Most of the activity is in indirect, finished goods. Corporate purchasers may be willing to stick their necks out and test the electronic waters but, more often than not, they do so cautiously, one step at a time. And that means veering away from certain types of make-or-break products. There's a lot less risk buying, say, paper clips over the Web than materials needed to make core machinery of strategic importance.

Forrester's research underscores that point. In a recent study of buyers in 50 corporations, few indicated they were ready to jump into buying direct materials.

Consider Edward Jarman, purchasing agent for Tri-Pak Machinery, a custom manufacturer of fruit and vegetable-packing machinery in Harlingen, Texas. For the past five months, he has used Materialnet.com, a marketplace for industrial metals but sparingly. For the most part, he relies on only existing, trusted suppliers for a range of most mission-critical parts, from circuit breakers to hydraulic cylinders. "The machinery we make has to be dependable and we have to know the parts will work," he says. "Or customers may only operate six weeks out of the year, but they're going 24 hours a day and they can't afford a breakdown."

Buyers are, of course, purchasing direct materials, too. but, when they do, it's generally in small amounts, and to supplement traditional buying methods. Jarman, for example, purchases steel through Materialnet, since, he says, "A piece of steel is a piece of steel." But, he does so sporadically, and only when time is not of the essence. A year ago, Bruce Miller, manager of raw materials and processing for Olympic Steel, a Cleveland processor and distributor of flat steel, started buying products over a site called Metalsite.com, bidding for suppliers' excess inventory.

For now, he relies on it as a complement to his usual procurement system, for less-important items he can afford to lose to a higher bidder.

I'm Cautious, But Enthusiastic

Despite such limited activity, however, buyers like Miller are enthusiastic about their experience. What they really like is the added convenience of Net markets, as well as the ability to reach a greater number of suppliers. Greg Avsharian is a case in point. As the president of Century Plastics, a Romeo, Mich., maker of plastic components for automobiles and consumer products, Avsharian swears by Suppliermaket.com, which he uses to buy everything from magnets to boxes. He says he's increased his supplier base by 35 percent since he got in on the act a year ago. "Instead of making five million phone calls you just throw out a bid online and you get the answer back quickly," he says. "The process would have taken days before."

They're happy about lower prices, too. Avsharian turns to Suppliernet when he's looking to reduce his costs, or an existing supplier has raised prices a tad too much. Recently, he found a new packing supplier who saved him 15 percent on a process "we thought we'd squeezed the last penny out of," he says. As it turned out, the supplier had a new way of configuring the packing and, as a result, was able to jam more of the product in the space. At the same time, however, there can also be too much of a good thing. In other words, once you win a good deal from a supplier, you can't count on getting it again. "I can't rely on making a one-time bargain part of an ongoing relationship," he says.

I Still Have Questions

At the same time, buyers aren't always comfortable with their Net markets' operation. For starters, there's the shoehorn problem: trying to make how they do business fit the way the electronic market works. There, the results are mixed. Mike Kraner, director of Western Family Foods in Tigard, Ore., a buying agent for beef, pork and poultry for a number of cooperative warehouses, has been purchasing from a site called FoodUSA.com since May. He uses it mainly to buy poultry, not other types of meat, however. Why? With those varieties of meat, prices can change from minute to minute. But, buyers of FoodUSA generally work through an intermediary, not directly with suppliers, as they usually do, and that can slow the process down considerably, according to Kraner. Generally, purchasers have had the easiest time with simple catalog systems, like Chemdex, in which buyers look for items sold by many suppliers at set prices. But, even there, customers may have to adapt their business process to fit the system. At Telik, where buyers used to order supplies, 22 researchers now do the job, going directly through Chemdex. That's resulted in greatly improved efficiencies, but, says Scott, "People don't like change. We've had our moments."

I'm Waiting for More Services

Technical integration is another point of contention. Few Net markets offer systems that seamlessly link all aspects of the process, from ordering to invoicing to fulfillment. In many instances, for example, buyers must put sales orders and invoices through manually. In cases where there is more integration, however, purchasers are happy with the results. Chemdex, for example, provides buyers with an invoice summarizing their activity for the week and will also help link their invoicing system to a company's own accounting system.

Don't Forget Suppliers

What about suppliers? According to industry analysts, they're considerably less enthusiastic than buyers. First, there are technical problems. "Suppliers find it more difficult than they'd thought to get up and running," says David Yockelson, director of the Meta Group, an advisory services firm in Stamford, Conn. "The technical challenges involved in updating and coordinating hundreds of products dynamically have been more than they bargained for."

More important, however, are fears that their competitive advantage may be eroded. Constantly being forced to lower prices on products to win business from other suppliers has proved to be a less-than attractive proposition for some suppliers. "They watch business going to the lowest bidder and they think, 'Maybe I don't want to be a faceless supplier,'" says Yockelson. Consider this: One buyer of a Net market linking purchasers and suppliers of food has seen beef suppliers balk at the prospect of potentially quoting a price to a regular customer, and then being forced to post a lower figure online only to have that same client subscribe to the Net market, see the lower price and wonder why he didn't get quoted it in the first place.

Not all suppliers share this fear, however. Dawn Grabinski, comptroller of Blachowske Truck Line, a Fairmont, Minn., trucking company moving dry bulk, was invited to bid one time on Freemarket.com - and hopes to be called again. "It would give us access to business we would be unaware of otherwise," she says. And, analysts predict as Net markets add more features -- posting information like product reliability or handling escrow management -- suppliers may feel more able to differentiate themselves from the competition and see more benefits to participation.

Ultimately, for many buyers and sellers alike, participation in Net markets is more of a way to get their feet wet than anything else -- at least for now. "We believe this is the way of things to come," says Telik's Scott. "And we're better off getting in early." Even buyers with mixed reactions, like Western Family Food's Kraner, echo that sentiment: "This is the wave of the future and we're going to stick with it," he says.

And that, of course, is the key lesson. For people on both sides of the transaction, the experience of using an electronic marketplace is a work in progress and a highly experimental one, at that. There's lots of potential, and lots of work to be done. But there's no stopping it now.

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