InformationWeek

It's actually an old idea-the company-to-company extranet-that's taking on a fresh look as businesses adapt emerging E-marketplace technologies to create closed, close-knit communities. Newport News Shipbuilding Inc. in Newport News, Va., which builds nuclear aircraft carriers and submarines for the U.S. Navy, recently began using a private exchange to work with a few dozen of its most trusted suppliers and design partners. "We're starting to be able to have functional experts who work for our suppliers, as well as other partners, work with us to produce the overall ship design," CIO Steve Hassell says.

The exchange-which incorporates Aspect Development's portal, cataloging, and supply-chain management software, Dassault Systems' document-management software, and SAP's R/3 ERP system-goes beyond collaborative design. For example, production managers can track the delivery of commodities such as nuts and bolts.

Private exchanges are such a popular idea that the number already in place or under construction dwarfs the number of public marketplaces, says Gartner Group VP of research Dave Burdick. He estimates there may be as many as 30,000 private exchanges in various stages of development.

Software companies are racing to position themselves in this growing market. Within a few days of each other, SAP co-founder and co-chairman Hasso Plattner and J.D. Edwards & Co. co-founder and CEO C. Edward McVaney said their companies will target the opportunity. McVaney says J.D. Edwards is abandoning plans to host public E-marketplaces, focusing instead on what he calls "complex collaborative" business-to-business interchanges. Says Plattner, "That's where I see the biggest market." Ariba, IBM, Oracle, and PeopleSoft all are moving in the same direction.

And a new heavyweight may be emerging. Shareholders last week approved a $9.3 billion merger of supply-chain optimization software vendor i2 Technologies Inc. and Aspect Development, a leading provider of business-to-business catalog content. Janet Eden-Harris, VP of corporate marketing at Aspect, says the combined company will focus on the private-exchange market and provide products for real-time collaborative design, supply chain, fulfillment, logistics, and other functions that enable a business to work with suppliers and partners to manage a product from design to delivery.

J.D. Edwards recently landed five major contracts for its private-exchange software, says senior VP of business-to-business E-commerce Michael Schmitt. The company's OneWorld platform handles design collaboration, production scheduling, supply-chain collaboration, logistics planning, fulfillment, warehousing, manufacturing, and order tracking. It's "a 100% rewrite of our previous products," Schmitt says. "Collaboration between customers and suppliers over a private exchange requires a new business model, new business processes, new technologies."

Private exchanges are secure Web sites run by a single company and opened only by invitation to that company's suppliers and trading partners. They differ from electronic data interchange systems, which are generally used for buy-sell transactions, and are an evolution of the extranets that many companies built to share information with partners. "If you insist on calling them extranets, then these are new, smart, collaborative extranets," says Jon Corshen, VP of product marketing at Ariba.

While some of the capabilities are similar to those available on public E-marketplaces, private exchanges are hosted on a company's own equipment, behind a firewall, and information is protected by encryption. That appeals to businesses with security concerns, says Lehman Brothers software analyst Neil Herman. Not only are companies reluctant to post proprietary information on a public exchange, but many want total control of their supplier networks.

It's not an all-or-nothing proposition. Many companies will use both private exchanges and public exchanges-but for different purposes. Public marketplaces will be used for commodities auctions and related services, such as managing the invoicing and delivery of purchased goods, Herman says, while private exchanges will be used to gain a competitive advantage via online collaboration with partners, real-time supply-chain management, and logistics.

IBM is building a private exchange with Ariba and i2, both of which are also partnering with IBM to build public exchanges. IBM will use the private exchange for collaboration in product design, procurement, and logistics for its Personal Systems Group initially and later for other business units.

Patrick LaFrankie, IBM's manager of strategic alliances, says IBM will use Aspect's product catalogs to determine which suppliers can provide the components it needs, then use that information to work with a list of preferred providers. Select suppliers will use the exchange to manage their inventory with demand-and-forecast information that's updated every three days. Currently, he says, such suppliers get updates every 30 days.

As expected, IBM last week also entered the public E-marketplace business (May 8, p. 22). IBM is partnering with Hitachi, LG Electronics, Matsushita Electric, Nortel Networks, Seagate Technology, Solectron, and Toshiba to create an E-marketplace, called e2open.com, aimed at the telecommunications and electronics industries. The companies raised $200 million from their own contributions and from private investors to build the exchange, which members hope will become a public company.

IBM's private and public exchanges will work in tandem, LaFrankie says. IBM intends to use e2open.com to purchase commodity parts, such as standard power supplies and switches. Specialized components such as highly engineered chipsets "will never be on public exchanges," he says, since they could alert competitors to the vendor's plans. IBM-or any company for that matter-would be reluctant to issue a public request for quotes for a part that's unique to a particular product design or that would signal to competitors how many of a particular product the company was planning to manufacture, LaFrankie says. "You don't want to run the risk that your partners will know you're buying components to build something that is 10 times faster than what's on the market," he adds.

IBM plans to extend the private exchange to other IBM business lines, with the expectation that it will lead to improved supply-chain management. Once the system is fully developed, IBM, Ariba, and i2 will sell the underlying technology platform to other companies, LaFrankie says.

IBM and its partners hope to reach companies such as Amherst Corporate Computer Sales & Solutions Corp. The Merrimack, N.H., company brokers large purchases of computer hardware, networking, software, and related products to midsize and large companies on the Web. Its customers usually have special needs, says CIO Kevin Hall. Amherst fills them using a private exchange built on J.D. Edwards' OneWorld financials, purchasing, inventory, and customer-service modules.

The software maintains a continuous, real-time connection to the inventories of Amherst's 24 largest suppliers. That gives the company up-to-date information on more than 200,000 products from more than 3,000 vendors. When customers log on to Amherst's Web site to configure a product and check availability, they see the total number available. When they place an order, Amherst's exchange handles it electronically and tracks fulfillment automatically.

"The concept of our private exchange is simple: We have to know every technology product in the world, where inventories are warehoused, how much we have to pay for them, and how soon we can get them," says Hall. "We show our customers a simple screen with a price and an availability date for what they want to order."

Given all the potential advantages, it's hard to imagine that private exchanges won't continue to grow in popularity. Their big selling point is hard to ignore: They let companies conduct very private business on a very public network.