E-Business Commentary -- To Exchange Or Not To Exchange

Dec. 21, 2004
Online auctions have their role, but so do extranets and private networks.

Is it better to purchase goods -- not merely MRO but direct materials, parts, components, and assemblies of all kinds -- at the lowest possible price via an online auction over an exchange? Certainly, there's plenty of savings to be had from this method of e-commerce. On a car, for instance, all kinds of parts are widely viewed as commodities, including tires, batteries, and air bags. Ford Motor Co. last year conducted an online reverse auction for tires, and watched for a dozen hours while a slew of bidders pushed the price of the tires the automaker was looking to buy through the cellar floor. Unfortunately, as we've seen, not all tires are created equal, and there certainly is a strong quality and design component inherent in tires that would make any self-respecting automotive executive think twice before buying the lowest-priced tires on the market. For manufacturers the alternative is to continue purchasing materials that require any kind of design component through the usual one-on-one channels. Proponents of the online exchanges says this "old-boy" method of buying and selling goods is necessarily wasteful. In their view it encourages higher prices simply as a result of the lack of competitive bidding in the process. But those who stand by the traditional method of purchasing claim that it affords them the chance to qualify the supplier and its product quality -- i.e., kick the tires -- as well as check out its manufacturing processes. They're not arguing that one shouldn't purchase pencils or even PVC in bulk over an exchange, simply that more complex products shouldn't be acquired with the lowest price as the only criterion. Some exchanges appear to be evolving toward a more collaborative model. The idea is to enable companies that are business partners to not only place orders online, but also to share designs and work together in creating new products. Of course, then the question goes begging: Can't this be done today, with companies interacting via a corporate extranet? Better yet, how about a private network reserved for one's current suppliers? Private exchanges, in fact, appear to be gaining momentum. For instance, SAP AG is making a major push into private-trading-exchange technology. According to a Jan. 11 AMR Research Advisory Alert, "SAP is betting, as is AMR Research, that the majority of SAP's enterprise-class customers will be putting tremendous amounts of energy and investment into PTXs [private trading exchanges] as a way to cement decades of building customer and supplier relationships." For example, Carpenter Technology Corp., a manufacturer of specialty steels, decided to eschew steel exchanges in favor of its own exclusive e-commerce sites. "The people we met with felt the exchanges didn't meet their needs," says Scott Myers, general manager of e-business at the Reading, Pa.-based steel firm. Another reason Carpenter Technology chose to go the e-commerce route on its own is that the company deals directly with customers, in effect operating its own distribution network of seven service centers located at key transportation hubs throughout the U.S. "We wanted to build on those relationships with our customers," Myers explains. "We see our business strategy and our e-business strategy as one and the same." By contrast, in many instances the exchanges tend to ignore, and in some cases, devalue, those long-term customer relationships. The specialty steel manufacturer set up a pair of Web sites. Carpentercare.com serves as an extranet for the company's largest customers, providing them access to business information. Another, called carpenterdirect.com, serves as a private exchange that handles online transactions. "With three clicks our customers can place an order for stainless steel bars," Myers says. The latter site also allows customers to place orders through Carpenter Technology for related products made by other firms, including aluminum, carbon steel, alloy steel, and brass. In talking to Myers, I got the feeling that, not unlike many manufacturers, Carpenter Technology likes the idea of maintaining control over its own e-commerce future, rather than surrendering it to a third party. Even in the new e-world, control means a lot. To exchange or not to exchange. That is the question for which every manufacturer must find its own answer.

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