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
2. Framework for B2B E-Commerce
There are many frameworks that have been developed for classifying B2B e-commerce, to describe the differences in policies and functioning of the various forms of B2B hubs. The intent of our specific framework is to include all forms of B2B e-commerce and to indicate the primary types of markets (e.g. components, capacities), where our risk management approaches provide significant economic gains, and possible adaptations to other types of markets. Our approach is a major modification of a framework recently suggested by Kaplan and Sawhney (2000), where our
framework enables the use of existing risk management models, or the identification of gaps to develop new models.
The Kaplan-Sawhney model described in Figure 3.1 above, has the classic 2 × 2 matrix, with systematic (collaborative) source vs. spot mar- ket on one axis, and operating inputs (meaning MRO - maintenance, repair, and operating - resources across horizontal industries, such as computers) vs. specific manufacturing inputs on the other. They clas- sify B2B marketplaces, which they call electronic hubs, or e-hubs, in one of the four boxes of the 2X2 matrix: spot markets for common oper- ating resources like labor, advertising, and manufacturing capacity are called yield managers, whereas on-line exchanges are defined to trade commodity like production inputs, such as steel and energy. So-called MRO hubs streamline the sourcing of low-value goods with relatively high transaction costs and catalog hubs automate the procurement of non-commodity, industry specific manufacturing inputs.
Observe that they categorize capacity under operating inputs, which is somewhat awkward. We will soon observe that our proposed framework is more consistent from a modeling and risk management perspective.
Figure 3.2 describes our framework for B2B e-commerce. Our objec- tive is to classify the different types of B2B e-commerce interactions and markets, and to model the economic gains that a combination of markets can help us achieve, rather than by using one type of market alone.
Observe that while our vertical classifications are the same as in Ka- plan and Sawhney in terms of spot markets and systematic sourcing to describe buyer-seller relationships, our horizontal classification is now based on standardized and customized types of goods or service. The reason for this is that we are interested in exploring the economic de-
sirability (through risk management) of using possibly more than one market type simultaneously.
We now discuss the specific elements of Figure 3.2.
2.1 Private Marketplaces
These correspond to systematic sourcing, which may be based on long- term contracts, implemented via the Web (or manually), and represent customized products. There are several elements of economics that could potentially preclude web based search and comparisons of customized products from multiple sources:
Shipment cost or difficulty
Uniquely engineered products with attendant difficulty or costs if procured from more than one supplier site.
The award to a supplier of preferred status and long-term rela- tionship, with attendant responsibilities of design and engineering work
Under these conditions, when the nature of the good or service in ques- tion is such that only a one-to-one buyer-seller relationship is possible or desired, virtual private marketplaces or B2B collaboration networks preserve pre-negotiated terms and relationships between specific buyers and suppliers so that their members can interact privately in the kinds of detailed, higher-value interactions they have always done off-line and
are now pursuing on the Internet. B2B collaboration networks provide an integrated software platform that connects companies in specific in- dustries and mainly facilitate the procurement and sales functions of the collaborative commerce network. Thus, these private marketplaces let their members share privileged information within a defined commu- nity of trusted business partners. They are mostly found in situations involving mission-critical, high value inputs and components or where high fixed costs occur.
For these situations, i.e., when only long-term sourcing is available and when only private marketplaces are used, the rich literature on tra- ditional supply contracts applies. However, these models on supply con- tracts provide little insights on how the possible presence of a second procurement/sales channel of short-term nature affects the situation.
The supply chain contract literature also ignores whether there will be a co-existence of long-term and short-term contracts or whether only one of these contract types will prevail. Later in this chapter, we present a quantitative model that addresses exactly this issue.
Note that it is possible to consider second (spot) sourcing under some conditions (though our initial description in Figure 3.2 precluded this possibility), even for nominally customized parts. This is a consequence of the fact that a customized part, such as a forging, normally considered unique, could in fact be spot sourced by spot capacity that has been obtained, and is used either with a spare identical die, or with the original die, while the original capacity is being used to produce another part type.
2.2 Catalog Hubs
Catalog hubs create value to all players by automating sourcing and procurement processes and reducing transaction costs when the details of the transaction have previously been agreed upon. They are designed to support systematic purchases when transactions take place with pre- qualified suppliers using contractually agreed upon business rules, e.g., pre-negotiated prices or pricing schedules. Catalog hubs can also aggre- gate demand or supply in markets with fragmented buyers or sellers and create value when there are a few large players and many small play- ers of the same type (buyer or seller). Note that in contrast to Kaplan and Sawhney (2000) we do not limit catalog hubs to industry specific manufacturing inputs but rather define them, more generally, for the systematic sourcing of goods and services, which are traded according to pre-defined business rules.
With systematic sourcing, and standardized components, it is possible to have alternate pricing schemes, when prices of components may not necessarily be fixed. This corresponds for instance to the situation when the manufacturer and the supplier share risk and reward with respect to demand uncertainty that results in unused capacity or unmet demand.
One such scheme is based on linear pricing, where the actual price is low- est when all the committed capacity is acquired, but increases linearly, as a smaller fraction of the committed capacity is actually acquired/used by the manufacturer. We discuss this mode, together with the next one (spot market), in the bulk of the chapter, as the alternate modes of most interest to us from an overall economics point of view of the B2B exchange/marketplace. It is important to recognize again that although catalog hubs by themselves may have similar characteristics to private marketplaces, the goods or services traded require a completely different modelling approach as they are sufficiently standardized, meaning that spot markets can be established for them, too.
2.3 Spot markets
Close cousins of traditional commodity exchanges, spot markets or on-line exchanges allow managers to smooth out peaks and lows in de- mand and supply by rapidly exchanging the good/service needed or pro- duced. It is important to notice that the type of good/service traded on exchanges can also include flexible production capacity, labor, trans- portation, and advertising resources.
The nature of exchanges implies that the pricing structure on these exchanges is dynamic and that buyers will thus face price uncertainty as supply and demand may change at any given point in time. This type of B2B e-commerce adds the most value in situations with a high degree of price and demand volatility, e.g., in utilities markets, high fixed cost assets with long acquisition lead-time, such as manufacturing capacity, or perishable items, such as transportation capacity and food.
While there are several types of market-making models, those most pertinent to spot markets and the current chapter are the auction model and the exchange model.
Auction Model
Auction models are most appropriate in industries where one-of-a- kind, non-standard, or perishable items or services are traded among businesses that have different perceptions of value for the item. Cap- ital equipment, used products, and hard-to-find items fit this model.
However, of more direct interest in the context of the current paper are multi-lot auctions and repeated auctions, which can help generate
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.