Online Marketplace Evolution

Online Marketplace Evolution

In their infancy, many online marketplaces kept their focus too narrow. Those that saw the big picture survived.

Imagine that your job as a procurement manager involved sourcing your company's needed resources from 500 different marketplaces. If you needed steel, you would go to a steel marketplace. If you needed gypsum, you would go to the gypsum marketplace, and so on.

Seems absurd, but that's what some early settlers in the online marketplace frontier once offered -- a niche so narrow that it drove them out of business. After all, normal people don't go to an egg store for eggs, a flour store for flour and a cheese store for cheese. They go to a supermarket that offers myriad choices and even has the added convenience of banking, dry cleaning, florist and photo services.

For those online marketplaces that understood the big picture, the reward has been longevity and prosperity.

Forecast: What's In Demand?

The Freedonia Group Inc., a Cleveland-based industry research firm, offers demand projections on numerous direct and indirect materials. Reports are available for purchase via the company's Web site: www.freedoniagroup.com.

Injection molded plastics:
U.S. demand is projected to grow 2.8% annually to 16 billion pounds in 2010.

Packaging machinery:
Global demand is expected to expand 4.9% per year through 2010 to more than $33 billion.

Industrial and institutional cleaning chemicals:
U.S. demand is projected to increase 3.8% per year, approaching $10 billion in 2010.

One example is Ariba Inc., a global provider of spend management solutions. The company is celebrating its 10th anniversary.

"If you look back 10 years ago, you had FreeMarkets [an online auction house] and you had Ariba, which offered an online catalog for procurement," notes Karen Master, an

Ariba spokesperson. Ariba acquired FreeMarkets in 2004. "Both companies very quickly realized that manufacturers wanted somebody who could help them solve real problems that they faced in manufacturing -- and they faced managing their spend. Most marketplaces that have survived, understood that in order to survive as a marketplace you had to offer things like supplier relationship management, spend visibility, spend analysis and contract management. The guys on the front lines need every piece of that to do their job."

According to Patrick Furey, senior category manager at Ariba, the company deals with the entire sourcing and decision-making process from end to end.

"I think the biggest evolution for us is that we've finally gotten past being pegged as only an auction company," says Furey.

Pat Furey, senior category manager, Ariba Inc.
Indeed, Furey mentions that when he goes out and talks to manufacturing companies, auctions don't even come up in the conversation anymore.

"We go anywhere from, 'Here's a spreadsheet with all of my spend in a given category -- can you help make sense out of this?' to, 'Can you help me formulate a strategy on how I can best source this category going forward?' Or, 'Can you help me understand the market dynamics and make better decisions?'"

So how can Ariba offer such sage advice? The company made a conscious decision to recruit people that had manufacturing experience, that had real-life sourcing experience and that had engineering experience that could help customers with every part of the process.

"Ariba was the first to automate the sourcing process and made the reverse auction a formidable tool for buyers," says James Polak, director of general purchasing at Pittsburgh-based PPG Industries Inc. "But they knew this wouldn't be enough, so they provided category experts to assist companies in their strategic sourcing efforts to ensure that identified savings actually reached the bottom line. Leveraging Ariba's integrated offerings, PPG moved away from antiquated paper-based processes and manual communications to automated ordering, sourcing and communication with suppliers that generated substantial savings and efficiencies."

Procurement Technology Utilization
Currently Use 12-month Plan
Contract Management 34% 29%
Business Process Outsourcing 20% 17%
Data Cleansing 17% 17%
Supplier Performance Management 54% 34%
E-Procurement 54% 27%
E-Payables 46% 20%
E-Sourcing 39% 37%
Supplier Network 39% 39%
Source: Aberdeen Group, September 2006

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