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January 10, 2000

New Options Fuel Growth In Online Procurement
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Gartner predicts that E-marketplaces will grow quickly as more companies use them, first for spot buying of commodities and then for ongoing procurement. "Although some of the initial procurement on E-marketplaces has been through spot-buying, several sites are starting to provide contracted online procurement," says Leah Knight, principal analyst for business-to-business commerce at Gartner Group. The research firm estimates that spot-buying accounts for 10% to 30% of procurement over trading hubs.

Analysts also say that purchasing managers are increasingly demanding that vendors provide a way to move easily among different online- procurement portals and other E-marketplaces. This would simplify and consolidate their procurement chores.

Sunoco Products, an industrial machinery company, for example, procures office supplies over the Ariba Network Exchange, a portal that provides access to thousands of MRO (maintenance, repair, and operations) suppliers using standard Extensible Markup Language data formats. Sunoco also uses iProcure for procurement of industrial supplies. The company has asked Ariba Inc. and iProcure to integrate their software and sites so Sunoco can consolidate procurement of office and industrial supplies, says Mark Michaels, who oversees Sunoco's procurement on the Ariba Network.

Customer demand will drive the consolidation of various forms of online procurement, says Forrester Research's Garretson. Software vendors and E-marketplace, auction, and portal providers will increasingly find themselves competing, analysts say.

The boom in online marketplaces can pose a challenge for some managers because numerous sites will offer similar products and services. For the most part, Gartner's Knight says, there is a distinction among the players, their business models, and products. For instance, in chemicals, Chemdex and Sciquest focus on specialty chemicals, CheMatch and ChemConnect concentrate on bulk chemicals, and Fobchemicals focuses on regularly sourced chemicals, with predefined agreements.

At the same time, however, a new group of companies are entering the market. Houston Street Exchange Inc. and Enermetrix.com let buyers spot-trade for energy, including electricity. And AIG Telecommunications Inc. is about to launch an online-trading site that lets telecommunications service providers procure and resell international long-distance phone services in bulk.

"Our site will let telecommunications service providers quickly and efficiently find customers for their unused long-distance capacity, nearly doubling their revenue in the process," says Eric Raab, managing director of AIG Telecom.

The growing competition is forcing operators of online-procurement services to bulk up for the future. Pioneers such as Chemdex and VerticalNet Inc. are expanding through acquisitions and partnerships.

Chemdex, having built an online-procurement marketplace for research scientists shopping for chemical and biological agents, is now aggressively creating similar trading hubs for the medical-supplies segment and other markets. Chemdex spent nearly $40 million developing an architecture to deliver comparison shopping for researchers. However, Chemdex was targeting a rather small market, valued at $10 billion.

Photo by Robert Houser Chemdex CEO David Perry decided to leverage the company's architectural platform to create new vertical hubs. The company acquired Promedix.com Inc., a hub for specialized medical equipment, in September, and late last year it bought SpecialtyMD.com. Chemdex also formed a company to streamline health-care firms' supply chains that it will own jointly with Tenet Healthcare Corp., a hospital chain that manages group purchasing of supplies, worth $3 billion.

"We plan to create several vertical marketplaces and thus amortize all of our technology and research and development costs across as many segments as we can," Perry says.

VerticalNet, meanwhile, is starting to add online procurement to its 54 informational martketplaces. The company was initially formed to provide advertising leads to manufacturers of products in 54 industrial segments.

"You'll see us expand through partnerships and mergers, creating vertical segments that can handle procurement to logistics and credits," says Mark Walsh, president and CEO of VerticalNet.

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