Watch for the Next Evolutionary Phase

A new procurement era dawned with the rise of trading exchanges. In actuality, the formation of these new supply chain species is just an interim step in an ongoing evolutionary process. The result will be a more upright-walking descendant of the current trading exchange: the meta-exchange.

[From iSource Business, December 2000] By-products of 1990s ERP implementations directly affected B2B purchasing and supply management, formalizing data for communication by electronic means. Business rules such as part-classification taxonomies, base units of measures and even data structures were defined implicitly around interactions with trading partners. In fact, these elements of effective catalog management are today at the core of the commerce engines offered by companies such as Ariba and Commerce One.

When ERP systems aggregated spend information across divisions and product lines, it became easier for organizations to strategically view their entire spend portfolio. This aggregation increased pressure on the supply base to reduce cost, demonstrating that information truly is power. One of the next steps in procurement's evolution  reverse auctions  focused this power and channeled it with laser-like intensity.

In the auction environment, supplier success in a reverse auction is predicated almost solely on price. Other benefits do accrue to the buyer, such as reduced cycle time from bid to award, but the primary purpose of auctions is to accomplish the goal voiced in negotiating classes: find the bottom. Reverse auction processes play to the least common denominator of sourcing. The host of the auction sets the event parameters and establishes threshold expectations for the seller. In essence, the subjective buying decision factors, upon which salespeople like to charge premiums, are destroyed.

Trading exchanges reintroduced some parity to the market by matching trading partners in a neutral environment. The focus in the exchanges is still primarily on purchase price savings, but suppliers benefit from greater geographic reach, reduced selling costs and new market and channel penetration. While reverse auctions reduce the tactical load upon sourcing organizations by expediting the iterative bidding process, trading exchanges enable buyers to evaluate offerings more strategically by electronically facilitating such strategic activities as market and industry analysis, source identification and qualification and supply offer request and analysis. Notably, most electronic trading exchange platforms also provide certain buyers with tactical support by incorporating some type of reverse auction functionality.

Trading exchanges therefore make strategic and tactical procurement processes more efficient. Much like ERP systems automated back-office functions, trading exchanges automate the transactional processes that arise out of business relationships between buyers and suppliers. However, these relationships still continue for the most part on the premise of "business as usual."

Enter the Meta-exchange

Meta-exchanges are poised to bring a new dimension to these relationships. While ERP systems, reverse auctions and trading exchanges have placed enormous power in the hands of sourcing professionals, and each addresses transactional efficiency in some way, the resultant productivity benefits are subject to the law of diminishing returns  companies need to invest increasing amounts in order to sustain continued productivity gains over time. The value proposition behind meta-exchanges involves financial return predicated on harnessing sourcing principles. The meta-exchange helps buyers achieve more than just purchase price savings and transactional efficiency.

Meta-exchanges are already operating in the business-to-consumer (B2C) world. The MySimon engine aggregates search results from many B2C shopping sites (or B2C trading exchanges) such as and according to user-defined search parameters. The user is then presented pricing, specifications and availability from each respective site.

MySimon does not originate any of the data delivered to the user. Instead, it aggregates existing data from other sites using an intelligent software agent (or "bot"). Much like robots, Internet bots execute programmed instruction sets to troll the Web for data according to predefined parameters and then compile the information collected from other shopping sites.

Clearly consumers using a B2C meta-exchange benefit from the bot's ability to perform instantaneous price comparisons, resulting in continued price pressure and productivity gains. However, the real power of these bots is their ability to be programmed according to user-defined need. If buyers were to define this need more broadly than purchase price savings and include improvements to working capital (primarily inventory and accounts-payable requirements), the buyers would be able to take advantage of a variety of sourcing options they traditionally would not have considered. A B2B meta-exchange would put this functionality at the disposal of purchasing professionals.

For example, my materials requirement planning (MRP) package may prompt me to place an order for a part. Ordinarily, I would execute the purchase order release with an approved supplier at a pre-negotiated price as represented in my ERP catalog. But given the insight into co-producers' inventory reciprocal that a meta-exchange would afford, I would be able to look at other sourcing options based on global part availability and cash flow requirements, such as:
  • Swaps
  • Barter arrangements
  • Outsourcing/subcontracting
  • Tolling
  • Payment terms options
  • Ability to search for substitutable products

In this model, procurement professionals would be responsible for global inventory replenishment and downstream fill rate rather than just purchase order administration. In an environment where information is the asset, a meta-exchange would enable a buyer to structure a deal not otherwise possible. Collaborative Forecasting, Planning, and Replenishment is being used to address similar issues in the supply chain with some success. However, this type of deterministic planning model requires significant internal horsepower. In a meta-exchange, supply and replenishment are viewed stochastically at a macro level.

To date, the electronic tools available to procurement professionals served to make us more efficient. For sustainable bottom-line results, the next generation of digital marketplaces must make our relationships more effective. Meta-exchanges would provide a vehicle to enable procurement decisions based upon sourcing dimensions not traditionally considered. In such an environment, the hotly contested topic of which exchanges will survive the "impending shakeout" will transform into a discussion about how exchanges will jointly originate, aggregate and deliver data according to user-defined parameters.

While no B2B meta-exchanges existed as of August, there is no technological barrier to their immediate construction. They are best suited to industries with easily substitutable and transportable products, such as the petrochemical, electronics or metals industries. Given that trends tend to migrate from the B2C world to the B2B space, purchasers in these and other industries should be on the lookout for a meta-exchange setting up shop in their space soon.