InformationWeek
Defining The Business Value Of Technology
October 4, 1999
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E-commerce is leading to an anything-goes environment of online bidding and dynamic pricing
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t was bound to happen. The success of E-commerce has led to the electronic version of another time-honored retail tradition: haggling.Most companies in the brick-and-mortar world, of course, negotiate prices with their customers. What's new is the Internet's ability to make pricing information available anywhere, to anyone, and at any time, creating a dynamic marketplace in which prices are more fluid than ever. And the fervor for online bidding, as exemplified by the mainstream success of companies like eBay and Priceline.com, is quickly extending beyond antiques and concert tickets to hard-core commercial items--everything from certificates of deposits to tractors. "Variable pricing is part of the [online] game now," says John Arnold, VP of E-commerce at Infospace.com, which provides directory and search services to Web sites.
Consider this: PNC Bank Corp. in Pittsburgh began accepting bids last month to determine what interest rate some consumers will receive on a limited number of certificates of deposit. Deere & Co. is auctioning used farm equipment to customers online on behalf of its dealers. And Visteon, the $18 billion parts subsidiary of Ford Motor Co., this summer held a "reverse auction" to source $150 million in circuit boards and other automotive components. By year's end, Visteon wants to solicit bids from its suppliers for another $350 million in multiyear contracts.
"Negotiating with multiple suppliers can literally take months," says Visteon CIO Dave Bent--while on the Internet, it can be done in hours. The auctions are a part of Visteon's aggressive companywide initiative to move the bulk of its supply chain to the Internet.
Eventually, online bidding may be as ubiquitous as stock quotes and free E-mail, analysts say, and will profoundly change how products move through the supply chain as buyers and sellers interact more directly and more frequently to determine what something is worth at a particular moment. "The Internet has taken the free market, the notion of supply and demand, and compressed it," says Brian Marshall, CIO of Westell Technologies Inc., a $100 million telecommunications equipment supplier in Aurora, Ill. "Static pricing will become a thing of the past."
Basic Forms Of Bidding
Two basic forms of online bidding--auctions and exchanges--are most common. In an auction, one seller entertains bids from multiple companies or individuals and controls the action. Prices typically move in one direction. Exchanges involve a neutral party that operates an exchange and sets ground rules for many buyers and sellers, who meet there and pay a fee for each transaction conducted.
In the securities markets, for example, the New York Stock Exchange and its peers set rules for trading on their systems. Similarly, exchanges in all sorts of other products are sprouting on the Web, and prices fluctuate according to market conditions.
Online bidding, also known as dynamic pricing, is being embraced most often at the end of the supply chain, where companies want to dispose of surplus inventory. Auctions and exchanges yield significant revenue for excess supply or discontinued products. Previously, many companies sent leftover products to liquidators, who paid 5 cents or so on the dollar and then tried to sell it for whatever they could get. "The problem with that model is that it doesn't capture the value of the inventory to the manufacturer," says John Ormesher, VP and co-founder of USBid Inc., which operates auctions for companies seeking to dispose of excess or obsolete inventory. "The value is maximized to the middleman."
Intersol Corp., a semiconductor manufacturer spun off from Harris Corp., earlier this year used an auction hosted by USBid to liquidate $800,000 in obsolete inventory. The results were better than if the Melbourne, Fla., company had gone to a trader to dispose of the products--a process that involves writing off the entire inventory up front and putting some revenue back on the books later if the products sell. "We see Internet auctions as a good way to move product and get a maximum value," says Intersol product manager George Downey
continued...page 2, 3
Illustration by Elwood Smith
Photo by Dwight Cendrowski
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