Brick-and-Mortars Create Own Online Marketplace

SAN MATEO (05/12/2000) - Savvy brick-and-mortar companies are starting to create their own online marketplaces for their industry's supply chain as part of a trend that could marginalize a number of startup exchanges that have emerged in various industries over the past several months.

Major companies in the technology, automotive, and convenience store segments of the economy are opting to maintain control over their supply chains by becoming ASPs (application service providers) to their suppliers rather than ceding control over their supply chain to third-party companies.

Most of those efforts take one of two forms. Companies such as Sun Microsystems Inc., Dell Computer Corp., Nortel Networks Corp., and IBM Corp. are building their own business-to-business exchanges for their suppliers, whereas major companies in both the automotive and convenience store segments have created exchanges to serve all their members equally.

For example, the National Association of Convenience Stores, in Alexandria, Virginia, is building an exchange that can be accessed by all of its 119,000 members. And earlier this year, Ford Motor Co. and General Motors Corp. decided to lead an effort to create their own exchange.

The automakers will still maintain assembly operations but are moving toward being system managers of suppliers and components, engineering and design, sales and marketing, and scheduling and distribution. These are the operations being targeted by exchanges, but outsourcing the services makes no sense for manufacturers, according to industry analysts, when they already own the IT infrastructure, the knowledge base, and the supplier connections.

"Ford and Boeing Co. have 24/7 capability [and] clustering that scales to millions of users. They have the IT, the data, the knowledge, and the supplier relationships [which they can] expose as ASP capabilities to the world of suppliers and get paid for it," said Jim Ivey, CTO at e-business collaboration solutions vendor Structural Dynamics Research Corp. (SDRC), in Cincinnati.

As might be expected, technology companies are leveraging their skills to jump on this trend early. One of the first major players with a project underway is Sun Microsystems' access.sun.net initiative which runs an online marketplace for its hundreds of suppliers in conjunction with supply-chain management partner i2, said Tony Levy, director of business marketing at i2 Technologies Inc., in Irving, Texas.

The exchange goes seven levels deep, modeling virtually all the Sun server architecture so that suppliers can collaboratively share their forecasts for supply and demand.

According to Al Ormiston, vice president at Sun and general manager at eSun -- the division responsible for building the portal -- in Palo Alto, California, Sun is catching signals coming out of the marketplace on the front end and then using that information inside of a portal to collaborate with suppliers.

"It has given us incredibly consistent production and planning and [has] enabled us to provide predictable lead times. It has taken cycles out of the supply chain," Ormiston said.

As well as the lure of potential profits from becoming an ASP, brick-and-mortar companies are responding to the fact that using an exchange requires them to give up intellectual capital by revealing their proprietary knowledge, observers said. This issue means that manufacturers are worried about an erosion of their power base.

"No one wants to work in areas where you have to exchange intellectual capital.

Look, the only way Ford differentiates among its competitors is its brand name and 100 years of acquired knowledge about building cars," SDRC's Ivey said.

"Manufacturing is becoming a smaller and smaller part of a producer's value-add," said Scott Crompton, director of Global Automotive Practice at SeraNova Inc., in Edison, New Jersey.

In contrast, by managing their own exchanges, top-tier producers will be able to manage the bulk of their business on their own. They also are able to offer a carrot to their suppliers, especially for those without a sophisticated IT infrastructure, by adopting this approach. The carrot is not necessarily more business, but a business that collaborates with the major producers in the manufacturing process. Indeed, the exchange-as-ASP model works especially well for smaller suppliers that lack IT sophistication.

"The final guy in the supply chain can't afford the Oracle database. The technology in these domains must cut across levels of sophistication," said Peter Osborne, partner in charge, E-Business Practice, at consultancy Deloitte & Touche LLP, in San Jose, California.

According to Jeff Kavanaugh, director of supply-chain fulfillment at systems integrator Inforte in Chicago, collaboration and coordination will allow companies to solve next week's product problems rather than last week's.

"The value proposition is improving the interaction, not the transaction," added Michael Crosno, CEO of Epicentric Inc., in San Francisco.

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