If you're thinking of becoming a cyber buyer, picking the best site is a tricky process. For starters, says R. Jerry Baker, C.P.M., former executive vice president of the National Association of Purchasing Management, These sites are in their infancy, and that makes it difficult to set up a rigorous set of selection criteria.
Then there's the sheer number of them: Some 600 new marketplaces were introduced last year, perhaps three or four in just one market. The upshot: Evaluating your choicesor whether to pick one at allcan be a downright confusing experience. Here are nine essential questions to ask before you
make your choice.
Does it meet your needs?
Net markets can take many forms. Some function more like exchanges and offer you or your suppliers the opportunity to trade commodities such as excess energy capacity. Others let buyers bid against each other for surplus goods. Still others are more like shopping malls or catalogs, giving buyers the chance to get online access to a wider-than-usual variety of finished goods and their suppliers. Your first task is to figure out which products you plan to purchase electronically and what type of Net market you need.
For example, Bruce Miller, manager of raw materials and processing for the Cleveland division of Olympic Steel, a Bedford Heights, Ohio-based maker of flat-rolled steel, and his colleagues wanted an efficient way to bid on products. A year ago, they signed up with Metalsite.com, an auction site for steel-related raw materials, to buy coil. Miller posts a bid online for a particular product and, about five days later, the winner is announced.
On the other hand, there's Rob Silber, purchasing manager of the San Francisco facilities of Elan Pharmaceuticals (based in Dublin, Ireland). He needed a network over which scientists could purchase laboratory supplies from more suppliers than they could get access to the old-fashioned way. Last year, he signed on with Chemdex.com, which hooks him up to 2,200 suppliers selling everything from latex gloves to monoclonal antibodies.
Fact is, you may need more than one marketplace category. A company could, for example, buy indirect products such as laboratory supplies from one type of site and go to a spot market, say, for certain chemical compounds. They're not mutually exclusive, says David Yockelson, director of the META Group, a market research firm in Stamford, Connecticut.
Another consideration in determining whether a site meets your basic requirements is how critical the products are to your operation. Chances are, like most buyers at this early stage of the game, you'll want to choose sites that sell less-essential products. When Olympic Steel's Miller needs to purchase critical coil products, he doesn't do it online yet, since he can't take the chance of losing out to a higher bidder. Instead, he travels the traditional route, working directly off-line with mills and other suppliers.
If you need to keep your company's name a secret while doing business over the Internet, then you'll naturally have to work with sites that protect your identity. Consider Jesse Paquet, buyer of subcontract machining services for Jamesbury Inc., a Worcester, Massachusetts, manufacturer of industrial valves. He uses a Net market called SupplierMarket.com to find manufacturers who will produce machine components according to his specifications, which he posts online. But he always does it anonymously. It's important that we're not opening up the doors to everyone, he says. Our competitors shouldn't be able to figure out who's bidding for what.
Is there a critical mass?
A Net market won't work without enough participating buyers and sellers. While there's no magic number, You must have multiple suppliers in every product category you're buying, says Laurie Windham, CEO of Cognitiative, a research and consulting firm in San Francisco specializing in the e-business field. That's the only way to have competitive pricing and motivate suppliers to behave the same way they'd behave in an open market economy. Your task is to pinpoint the products you need and then investigate whether their suppliers are on the site. Before Elan Pharmaceuticals' Silber signed on with Chemdex, for example, he determined which of his existing suppliers were participating and how much inventory he bought from each one. When he figured out that it came to at least 20 percent of his total volume with the potential to grow to 40 percent in a year or two, he decided the move was worth it. At the same time, however, while it's important that core suppliers are signed on, other potential suppliers should be there as well. It's all about seeing what opportunities exist for better prices from suppliers I don't know anything about, says Yockelson.
Quantity is only part of the equation. Find out whether the participants are reputable, well-known players. One benchmark is whether or not companies known as trendsetters in the industry have signed on. It's also important, says Laurie Orlov, research director for e-business applications for Forrester Research in Cambridge, Massachusetts, to make sure they have a screening process so they're not letting just anyone onto the site. That means getting specifics about their process for qualifying suppliersfor example, whether they send out field reps to suppliers' facilities to make sure they really provide the services and products they claim to sell. They need to look, see, touch what's out there, says Gregory Avsharian, president of Century Plastics, a custom-injection molder in Romeo, Michigan, that participates as both a buyer and seller on Net market sites.
How savvy is management?
It's imperative that those running the operation possess the skills, knowledge and resources to do the job right. The management team must really understand the market, the intricacies of the industry, says David Tabors, a principal with Battery Ventures, a venture capital firm in Wellesley, Massachusetts. Finding the answer may require a lot of time on your part. Silber, for example, met perhaps six times with company personnel, from local sales reps to the president, before making his decision. In the process, he says, I discovered that they weren't rookies. If the founders don't have the required expertise, you should expect them to fill the gap with other managers. A case in point is Pedestal.com, started by two former Merrill Lynch traders to streamline the process of buying and selling home loans. They gave their management team more depth by bringing in a seasoned industry executive to be CEO, plus a team of five others with industry experience in everything from sales to training.
How solid is their financial strength?
There's no point in hooking your business up to a Net market if it's not going to last. But a company needs deep pockets to launch and run a siteanywhere from $5 million to $15 million for the first 12 to 18 months and the same amount per year after that, according to Tabors. Protect yourself by checking into the company's finances. That's a tricky move, of course, if the operator is private. Still, there's a lot you can do. Start by finding out who the backers are, how much they invested and whether it's likely that they'll invest in future rounds. Find out who sits on the board of directors and how well-connected they are to potential funding. Ask the company for a discussion of their business plan. While they won't disclose confidential information, they should let you know something about their business model and financing plans.
How easy is it to use?
The system needs to work the way you work. That means it's easy and straightforward to search for items or place an order. If you get in on the act early enough, you should also expect, like Jamesbury's Paquet, to work with network designers on the screen design. On his suggestion, for example, the Net market operator revised their drop-down menus to make them more detailed and reorganized the way buyers posted requests for parts.
Can the system potentially automate all phases of the purchasing cycle?
For now, most Net markets don't offer end-to-end systems that make it possible for buyers to do everything from getting price quotes to placing an order and paying for goods. In fact, most handle only one part of the solution, says Forrester Research's Orlov. The upshot: Whatever the network does now, you need to make sure it's worth your while. Consider Alan Petzo, purchasing manager of Worthington Steel, a processor of flat-rolled steel in Porter, Indiana, who buys and sells steel over e-Steel.com. For the moment, Petzo can strike a deal over the system but he can't do much more than that. He still has to produce a purchase order manually and then fax it to the supplier. Even so, Petzo feels he's getting plenty out of it. We get access to hundreds of suppliers at one time, rather than having to make separate phone calls and send faxes to each one, he says.
At the same time, keep your eye on the future. That means making sure the operator has plans to bring on new capabilities. Ideally, they will agree to let you take part in developing them. The bottom line: You must have confidence that the current state of technology is just the beginning.
Olympic Steel's Miller is a case in point. For now, he only uses his Net market to bid on products; the paperwork is done off-line by hand. But he expects to see the system evolve, eventually offering the ability to complete the entire process with practically the touch of a few buttons. We're in the early stages now, he says. This is the first step.
How to see the future?
Talk to the company about their plans. Look for such issues as what languages (such as extensible markup language, or XML) they're using or whether they're working with Oracle or other key partners. And find out what technology they're beta testing. For example, while you might not be able to tie into their system with your back-end ERP systems for paying bills, cutting orders and the like, the company might be testing out such capability with bigger customers. Remember that even if you're a mom-and-pop shop years away from taking advantage of a fully integrated system, it's still important to sign on with a technically savvy Net market capable of attracting the big guys.
Can the system grow?
The buzzword is scalability. As more people use the system, will it be able to handle the increased traffic? To find out, you'll need to understand the basic architecture and how it can be tweaked to address potential trouble spots. If there's a bidding process, for example, make sure there isn't one central choke point that everything runs through and that can cause chaos if it fails. Catalog sites should be capable of holding large amounts of complex information and still be able to respond quickly to a search, even in times of high demand.