Scope and Definition of B2B E-Commerce
Definition 3.2 Business-to-business markets are platforms on which B2B e-commerce may be conducted directly between buyer and seller or
3. Characteristics of Markets Participating in B2B E-Commerce
equivalent spot market demand-price curves. The fact that similar (or same) quantities may have different prices in different auctions results in demand and random price curves.
Exchange Model
Exchange models create value by temporal matching of supply and de- mand using real-time, bid-ask matching processes and market wide price determination. The exchange model is suited best for near-commodity items with volatile demand. Similar to the situation in financial mar- kets, derivatives such as forward contracts and options, can be devised for exchanges or spot markets, with respect to commodities or flexible manufacturing capacity. This market type is closest to the theme of the current paper, which is the direction that electronic markets are moving in.
3. Characteristics of Markets Participating in
and the goods that trade hands and monitor their ratings, e.g., Supply- Works teamed up with Open Ratings to build a supplier-performance rating system that customers can access using supply chain market- places and exchanges built on SupplyWorks’ Max e-procurement solu- tion. Companies make also increasing use of third-party inspectors who perform physical inspection of goods that trade hands to reduce supply quality uncertainty. Despite all these measures, sources/markets have varying degrees of quality, and this characteristic is certainly a key ele- ment when managing economic risk in drawing upon one or more sources and meeting demand (sometimes with a minimal quality requirement).
Later in this chapter, again for pedagogical reasons, we focus on perfect quality sources, and only briefly allude in passing to the implications of differing levels of quality on the nature of “optimal” polices and the resulting costs and/or profits.
3. Channel Conflicts
Although existing intermediaries and new B2B exchanges can act as complements and are not necessarily substitutes, it is still unclear how spot markets affect existing buyer-supplier relationships. For instance, for electronic parts distribution, Avnet and Arrow Electronics, two dom- inant incumbents, joined forces with ChipCenter and QuestLink to form eChips in order to compete with the newly created marketplaces E2open (a consortium of IBM, Hitachi, Nortel Networks, Toshiba, Lucent, and Solectron) and eHitex (created among others by Compaq, HP, and Gate- way). Thus, as an alternative to the collaborative framework used in this chapter, where we consider a cooperative approach to use a long-term (reservation capacity based) supplier and a spot market, there could be a multiple channel environment, where the channels are in conflict.
Dynamic game models can be used to model these environments.
4. Pricing Dynamics
While fixed prices are well suited for small-ticket items with small transaction volume or catalog models with pre-qualified suppliers and predefined business rules, price mechanisms in exchanges, in particular in spot markets, using real-time, bid-ask matching processes will result in highly dynamic prices. Not surprisingly, most procurement managers do not know how to deal with the new volatile price environment and are thus reluctant to fully use B2B exchanges.
Moreover, as the implicit value of any supply contract is driven by the underlying demand distribution for the item in question, the per- ceived value of a contract differs from company to company as it is
driven by (among other factors) the distribution of a company’s end de- mand. Hence the question arises on what a fair and efficient price, e.g., for perishable capacity, should be. Similar to approaches for financial exchanges, one could argue that there should exist a price equilibrium between long-term and short-term contracts. However, the argument becomes much more involved as the value of a contract is potentially different for each of the players. Furthermore, from a supplier’s point of view, dynamic pricing bears the risk of alienating big, strategic cus- tomers who insist on lower prices than their competitors or other cus- tomers of the supplier and who may find out that a component is sold at a lower price via a B2B exchange.
Later in this chapter, we use a simple affine pricing schedule for the reservation capacity cost as a function of the quantity actually bought in relation to the quantity reserved initially. Consequently, this pricing schedule captures the risk sharing agreement between a manufacturer and his long-term supplier for the supplier’s underutilized capacity re- sulting from the mismatch between the reserved and used capacity. The spot market is assumed to possess a fairly general random price that may depend on the amount the manufacturer purchases on the spot market.
5. Fairness
One of the most commonly cited challenges for B2B e-commerce is the question of fairness in B2B exchanges. As stated above, the implicit value of any supply contract depends on the underlying demand distri- bution, and consequently a contract may have very different values to different companies. Hence it is unclear what a fair price for the item traded should be (in particular, perishable items or goods with high holding and storage costs will cause difficulties). Similarly, some ben- efits due to exchanges are only the result of the interaction of several players, e.g., it is widely accepted that demand aggregation reduces pur- chasing costs through quantity discounts. Although it seems intuitive that the savings due to demand aggregation are passed on such that bigger buyers obtain a higher share of the total savings, it is not clear how this issue is going to be resolved. That is, there are no models that are widely used in practice to compute optimal solutions, despite the fact that the problem is a long standing one that is well known in the economics literature.
6. Incentives
A recent report by AMR Research (2000) states that suppliers balk at using Web exchanges, especially since they pay the fees charged when
doing business on-line. Meanwhile, suppliers must still manage their own inventory, logistics, and customer service. Overall, most experts agree that there must be value-added propositions for both buyers and suppli- ers to induce membership in any specific exchange. “If these exchanges are to succeed, there has to be a superior value opportunity for all sides, and if not, then no side will participate,” says Chuck Donchess, execu- tive vice president and chief strategy officer for Commerce One. Conse- quently, some modifications may be required in the future, in adapting the results in this chapter, so that the supplier’s economic perspective is captured in implementing risk management from a manufacturer’s perspective.
7. Spot market with Lead-time and Derivative Prices
A spot market can have either zero or finite lag (lead) time. Similarly, the demand-price curve can have a fixed price, random price, or the price can be a derivative such as a forward price, real option, etc. In this chapter, we consider spot market prices as fixed or random, assume zero lead times, and defer a discussion of the other variants to another paper.
8. Multiple Parameter Trade-offs and Risk-preference Structures Having access to more alternatives increases the complexity of decision- making to both vendors and customers. Both will have to trade-off multiple criteria, such as price, quality of supply, or lead-time. For in- stance, some spot markets may offer the same item at a lower price, but also with a lower quality of supply than others at the same point in time. Furthermore, although firms should be risk-neutral with respect to small investment and procurement decisions, many managers would like to account for their aversion against the risk associated with ex- changes. Both the multi-parameter trade-offs and risk preferences are not explicitly considered in this chapter, for ease of exposition.
The extensive list of issues with regard to B2B e-commerce implies that the associated decision-making becomes very complex and that there is an urgent need for decision support tools accounting for un- certainties and risks associated with B2B e-commerce. To this end, in this chapter, we will describe recent novel research which provides an- swers to some of the procurement issues discussed above. We begin our presentation with a short review of traditional supply contract literature which applies to private marketplaces. We then continue with more re- cent research that mainly focuses on exchanges, and more specifically, on risk management through the interaction of (spot market) exchanges
and traditional supply contracts. This work is of great significance in helping manufacturers manage their economic risk in choosing between different types of suppliers such as:
a possibly lower priced long-term (reservation) capacity, with a risk of having to pay for unused capacity if demand is low (that can be shared with the supplier), versus
a (potentially) more expensive spot source, which ensures excess demand is met in the instance that demand is significantly higher than anticipated and provided for with the long-term supplier alone.
In the next section, we begin with an overview of some recent re- search which addresses the quantitative risk management issues we have repeatedly alluded to above and then describe the results in some detail, and conclude with future directions.