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May 10, 1999

Bazaar Advantage

Electronic marketplaces offer unique benefits to buyers and sellers, and could transform business-to-business commerce

By Gregory Dalton

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hough new in format, the concept is as old as commerce itself: Sellers gather in a central location to offer their wares, and buyers come for the convenience and the ability to compare prices. Now, marketplaces are proliferating on the Internet, and some analysts say they could radically transform business-to-business commerce.

Next week, W.W. Grainger Inc., a $4.3 billion industrial-supply distributor in Lincolnshire, Ill., will launch OrderZone.com, a Web marketplace that will sell a variety of business products and services from Corporate Express, VWR Scientific, and others. Marshall Industries, a $1.5 billion distributor of electronic components in El Monte, Calif., last week debuted SpotMarket.com, its own marketplace for semiconductors, computer parts, and production supplies. And in late March, procurement software vendor Commerce One Inc. unveiled MarketSite.net to let companies buy nonproduction supplies online from suppliers such as Boise Cascade Office Products, Factory Direct, Graybar, and Office Depot.

These are just a few of the 1,000 online marketplaces that exist today. That number will explode to 10,000 by year's end, predicts Gartner Group analyst Roy Satterthwaite. The reason: Online marketplaces offer big advantages over extranets to IT departments and business managers at companies that sell online. Companies can connect to many buyers without having to create point-to-point connections to each, reach new customers, and leverage information from competitors to increase sales. Many marketplaces handle the tricky task of integrating large amounts of product information from a variety of vendors using different systems, and some sites are adding software applications for conducting online auctions, which let sellers unload excess inventory and outdated models more efficiently.

Companies that buy products online also get advantages from linking their procurement applications to the marketplaces. IT managers don't have to manage four or five systems for buying from various suppliers. Purchasing is quicker, and companies can save money by comparing prices and taking advantage of auctions.

Online marketplaces are still new, but many IT executives are looking at them seriously. "We see these as important to our future," says Ron Davis, VP of IS at Fujitsu Computer Products of America, which is rolling out ProcureWorks, procurement software from RightWorks Corp., to 350 of its 700 employees who purchase several million dollars' worth of nonproduction supplies annually. But his company, which makes disk drives and other components, accounts for only a fraction of Fujitsu's 15,000 employees in the United States, and other divisions use different procurement applications.

Since Fujitsu Computer Products of America can download product information into ProcureWorks from MarketSite.net, Davis says it could collaborate with other Fujitsu divisions via MarketSite.net to gain more leverage and negotiate better prices with suppliers. "Combining with other interested parties through RightWorks' affiliation with Commerce One would give us one avenue to do that without having to build a lot of infrastructure," he says. Eventually, he envisions collaborative procurement capabilities that let Fujitsu negotiate single contracts on items such as mobile and data communications, travel, and perhaps even consulting services, which would help the company realize considerable savings.

Electronic marketplaces go beyond supplier extranets by providing information on--and the ability to purchase--products from many companies, including competitors. Most also support automated transactions and host workflow applications, such as those for purchase approvals and accounting. Buyers log on to a marketplace Web site using a browser, register, and set up a method of payment before shopping for goods. The site handles the transaction, routes the order to the vendor, takes a fee--usually a small percentage of the transaction's value--and transfers payment to the vendor's account. The vendor then ships the product.

Some sites let users access information on products and order using a Web browser. But the more useful sites, including MarketSite.net, let buyers download information into an electronic procurement application, such as Commerce One's Buy Site and RightWorks' ProcureWorks, so transactions can be routed through an approval process and a purchase order created. Many marketplace sites and procurement application vendors are working together to standardize their systems on the protocol known as Open Buying on the Internet--an architecture for real-time, high-volume transactions between businesses and suppliers--or the Extensible Markup Language.

Procurement software vendors and business-to-business suppliers are scrambling to build marketplaces before competitors do. Some suppliers are inviting competitors to join their marketplaces, so buyers will come to comparison shop. Another strategy for attracting buyers is to provide features that make shopping more convenient. SpotMarket.com, the marketplace for electronic components, for example, features online auctions, a discount center for the sale of surplus products, and tools for locating specific parts, or parts at a specific price. Marshall Industries, the electronic components supplier, is its only supplier, but CEO Robert Rodin is planning to add others as quickly as possible.

Vendors are also developing or enhancing products that let companies set up marketplaces. Tradex Technologies Inc. last week introduced Tradex Commerce Center 6.0, software that lets a company create and manage a marketplace. It's being used by Hospitality Open Trading Network, a marketplace that facilitates trade among companies in the hospitality industry in Australia and New Zealand. Within five years, the network wants to have more than 60,000 buyers and 100,000 sellers conducting transactions worth more than $65 billion.