Buying Products
through the Internet

Virtual marketplaces provide customers
with new ways to do business

By Jennifer Read

Part 1 of 2

Business to business E-commerce is defined by the GartnerGroup, as
goods and services for which the order-taking process was completed
via the Internet. This includes purchases via Internet EDI,

e-marketplaces, extranets and other sell-side activity, but excludes activity
over proprietary networks. As anyone who can read can tell you, the topic
is very hot, and companies everywhere are struggling to integrate these new
tools into their procurement strategy. One interesting twist to the phenomenon
is that consumer to business e-commerce is more advanced than business
to business. Usually technology starts at work and moves to the home. Most
of us learned about word processing and spreadsheets at work, and then bought
home computers and started doing our own taxes. In the realm of e-commerce,
however, we are researching, comparing and buying everything from cars to
mortgages on-line, but when we get to work, we are still faxing and mailing
our purchase orders, for the most part. Some companies have made headway
in the realm of MRO (maintenance, repair and operation) buying, but many
are not ready to source strategic components online.

Bret Miller and Dennis Baldwin are engineers at USA Harness, in
Winnsboro, Texas. Both use the Internet to find information about
components from suppliers' websites, but say they are not doing any
online buying. "We are more interested in automating the front end of
 the business by connecting with our customers' systems to do invoicing
and order taking electronically. But that will be a challenge, because some
of our customers have proprietary systems and it will be difficult to integrate
them with ours," commented Miller.

"I can see the advantage of being able to access information about
multiple suppliers of a part from one website. Now we have to check
each suppliers' website individually and then make the comparisons
ourselves. A website that would do all that for you would be helpful.
We are moving in the direction of doing more procurement online,
we just haven't gotten there yet," concluded Baldwin.

There are a number of different business models that have evolved.
Since creating a website is something your average thirteen-year old
knows how to do, it is pretty easy to establish some kind of presence
on the web. What is more difficult is achieving what is called "liquidity."
Just as the shopping mall down the street must have a variety of stores
to be successful, e-marketplaces must have enough suppliers and users
to reach critical mass. For example, while most suppliers have websites
that give contact and product information, companies understand that
Internet shoppers would rather find product information on a site that is
sponsored by an independent third party so they can do comparisons.

But product information is only just a start. The hope is that users will
not only buy products online, but link their systems with those of other
companies in the supply chain to automate the procurement process entirely.
Eventually, the experts believe that companies will collaborate with both
their suppliers and their suppliers' suppliers – and customers and their
customers' customers to create a giant interconnected electronic web of
information that will eliminate excess inventory and inefficiency across
the supply chain and create more profitability for everyone. But there
are several barriers to that nirvana.

For one thing, companies don't trust their trading partners very
much and are reluctant to share information, even if it would
mean increased profitability. For another thing, there are so
many different software and hardware configurations in use,
it is difficult to connect them all. The standards issue is being
addressed by RosettaNet, a consortium of electronics industry
leaders. The trust issue will be resolved with more difficulty.

Right now there is considerable confusion as new exchanges and
partnerships are announced on a daily basis. While websites that offer
product information, industry news and online community have been
available for several years, the ability to actually transact business
online is new. These exchanges are sometimes initiated by users;
by traditional bricks and mortar companies, such as manufacturers
or distributors; or by independent third-party players. The jury is out
on which type of collaborative effort will be most successful: there
are advantages and disadvantages of each. In addition, there are
several business models for buying products. Robert C. Damron,
an analyst at Tucker Anthony Cleary Gull in Minneapolis outlines
the following general categories of online marketplaces, but most
websites offer a combination of models.

Online catalogs: aggregate information in one place
about any number of products and suppliers.

Online auctions: real-time conducted events where either sellers
offer products to the highest bidder (traditional auction), or
buyers place bids which can specify price, quantity and other
parameters (reverse auction).

Online exchanges: sellers list inventory and asking price at online
"hubs" while buyers bid on the inventory. This model is
designed primarily for high volume transactions.

But how do these online outfits make money? Many charge
the seller a fee, or charge by transaction. Others are expansions
of consortia of bricks and mortar companies such as distributors
or publishers, who rely on other revenue sources.

Why Bother?

Some of the sites primarily offer product information and
industry and market news. Some argue that if the website
connects buyers with sellers, what difference does it make if
the sale is conducted online or not? Other content-oriented
websites, such as www.Manufacturing.net, are planning to
offer transaction services soon. Others, such as ChipCenter,
do the search and provide links to suppliers' websites, or suppliers'
phone numbers to order. Some of the websites are partnerships
among diverse electronics industry entities such as publishers, distributors,
component suppliers and software solution providers. Others represent
themselves as independent third-party platforms or exchanges providing
neutral services and expertise. Fees are sometimes charged to the sellers
or buyers, or revenue can come from advertising, sponsorship or
membership fees. Users should carefully evaluate the total cost of using
these marketplaces; many of the auction-type platforms leave major
negotiations to the participants.

Some industry watchers – and component suppliers — express concern
that the auction model will lead to products becoming commodities,
with price being the only consideration. Unsophisticated or unethical
suppliers could sell products below cost, without regard for profit
margins, long-term relationships and value-added services.

Mark O'Donnell, president of Kenwood Electrical in Rockford,
Illinois uses these websites primarily as a spot market. "In the past,
when you were having trouble getting a part, you would have to get
out the yellow pages and start calling around. That process was extremely
time consuming. The websites can really save time by locating the
suppliers that have the part first. Then you can start calling."

O'Donnell believes that the actual transaction still must be made
person to person. "I don't think the prices you get off the Internet
are very competitive. I think you need to negotiate price by phone.
That's been my experience, anyway."

For other inventory management services, O'Donnell is going
to a distributor, rather than working through the Internet. "I am
talking to distributor Avnet, Inc. about getting them to manage my
inventory. They have the capability to really automate the whole
process, and I am probably just going to let them do it, rather than
set up a program myself." O'Donnell wants to be able to go to the
distributor's website, and get information about his inventory in real-time.
"Distributors already have that system in place. When I am a customer,
they will give me a password, and I will be able to access information
about my account to check order status, and that type of thing."

With the proliferation of companies and models, an industry
shakeout cannot be far behind. The market will reward the most
efficient provider, as usual. Whatever the model that emerges
victorious, we can rest assured that the way business is conducted
ten years from now will probably be more like Amazon.com than
it is today. And we will all feel pretty much at home.

For a reprint of this article please e-mail: marilyn@wiringharnessnews.com