Online Marketplaces Are Back in Play

An improved approach to the market offers manufacturers an effective way to find new suppliers.

It's difficult to deny that online shopping has totally transformed consumer buying habits. With a few clicks of the mouse, customers can have practically any product in the world delivered right to their doorstep. Most manufacturers have been aware of the same perks offered by Web sites called "online marketplaces" since the Dot-Com era. But for one reason or another, most of them weren't quite ready to jump on board.

In the meantime, words like "Amazon," "Craigslist" and "eBay" have become ingrained in our vernacular, and doing business online has become almost second nature. This cultural shift has led online companies to start giving manufacturers another look at what these marketplaces have to offer. And this time around, they seem much more open to the idea.

At least that's the case for Tesla Motors, a manufacturer of high-performance electric cars. While the growing company relies heavily on contract manufacturers to make various critical components for its vehicles to retain control over the manufacturing process, a large percentage of its bulk parts (metal castings, plastic molds and small sub-assemblies) are sourced through such Web sites as MFG.com, a global online marketplace that specifically targets the needs of the manufacturing industry.

According to Stephen Davies, materials program manager for Tesla Motors, one of the more significant benefits of using these types of services is the quick access to a vast range of quotes and pricing options.

"You save a lot of time on the front end because you're being introduced to a much larger number of potential suppliers in a very short period of time," Davies explains. "Instead of cold calling, you're getting 50 responses that can easily be vetted down to five suppliers that you never would have known about otherwise. Going through that process after being exposed to such a high volume of suppliers can be a really valuable tool."

As opposed to a commission- or transaction-based fee, MFG.com allows buyers to use the service for free, while suppliers pay a subscription fee, which typically ranges from $5,000 to $10,000 per year. According to Mitch Free, founder and CEO of MFG.com, a key part of the site is a user rating system. Suppliers are rated by quality, timely delivery and customer service, while buyers are graded on factors such as timely payment, quality of technical data and ease of doing business.

"When the community does the vetting, it judges [suppliers] based on real-world actions," says Free. "Did they do what they said they were going to do? Did they deliver a good product? The community can be an extremely powerful force in policing and evaluating the participants of an [online] marketplace. For some companies, it's total due diligence, while for others this starts the relationship. It depends on the size and longevity of the order."

Choosing an online marketplace to source through can come down to factors from the range of services or ease of use. But if your intellectual property isn't protected, the rest won't matter. As a result, most marketplaces have incorporated ways to assure customers that content posted online will remain safe and secure. On MFG.com, for example, this includes online digital nondisclosure agreements and digital rights management to prevent unauthorized access to a customer's design data.

Davies says non-disclosure agreements are a critical part of his confidence level, but Tesla's policy is still to check up on potential suppliers no matter how good their online profile looks. "You can't help but hear about failure rates associated with sourcing online, resulting in either losses or unfulfilled contracts; you should always keep in mind that you can't believe everything you read," he adds.

So whenever Tesla Motors sources a part through an online vendor, it also performs an on-site evaluation of the supplier before payment is made. While there may be a loss in time and a few travel dollars, Davies says they get a better feel for whom they're dealing with. "We don't just send a check to whoever won the bid and hope they send the parts. We're trying to develop a relationship and a partnership with that supplier."

Even with higher levels of protection across the board, some manufacturers are still resistant to sourcing through online marketplaces. According to Free, some of this stems from bad impressions left behind from the early days of the market, when the sites were seen as little more than a race to the lowest price. Today, it's clear that online buyers are looking for a lot more.

"Those experiences tainted people's view to think that all these sites were designed to [reward] the lowest-cost provider -- where suppliers don't get credit for having good quality or good on-time delivery, and that it's all about price," Free explains. "But that's not the case anymore. Companies sourcing online take into account all of the same factors -- quality, delivery, customer service. It's about a lot more than just price."

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