B2B potential unrealised

With the proliferation of business-to-business (B2B) Web sites, we're witnessing the emergence of the phenomenon of oligopsony - what economists call a condition where many sellers encounter only a few buyers. For instance, US military weapons manufacturers have only a few customers (governments). So far, oligopsony transactions have been rare because of difficulties in coordinating purchasing decisions among competing sellers.

But Web-based B2B auctions have changed that. They offer ideal conditions to operate purchasing alliances. If fully developed, they'll likely lead to a global concentration of purchasing power. When that occurs, it will influence how corporate information technology is run because the alliances will realign the management of global logistics.

Already, B2B alliances are forcing corporations to re-examine procurement and sourcing strategies. This kind of turmoil will help bring the CIO into the corporate boardroom to offer advice on how a firm might counter the potential erosion of profit margins when B2B arrangements help lower costs.

But before you plunge into any B2B venture, consider that success will be increasingly dictated by a firm's capacity to use its economic clout to get the lowest possible bids from suppliers.

For example, consider Covisint, the online purchasing consortium just approved by the US Federal Trade Commission, representing Ford, General Motors, DaimlerChrysler AG, Nissan and Renault. These five firms account for 44 per cent of the cost of goods sold ($US379 billion industry-wide) and 91 per cent of net profits ($20 billion) of the entire global automobile industry. These firms expect to realise material cost reductions from their adoption of Covisint-based procurement methods because Covisint's economic power will give its members pricing leverage over an estimated 50,000 suppliers. (The FTC and German authorities are still concerned about potential antitrust violations, though.)If you're the CIO of Honda or Mack Trucks, you'll have to decide whether to adopt the data formats, procurement procedures and information-processing methods, plus a large collection of rules for the conduct of business as defined by Covisint, set up your own B2B site or join some other alliance that would compete against Covisint.

It seems that many companies are recognising that they can increase profits by joining in a cutthroat auction market where suppliers will have to rely on pricing and conformity with standard specifications to win business on the terms and conditions dictated by a handful of dominant firms.

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More about CovisintDaimlerChryslerFederal Trade CommissionFTCHolden- General MotorsHonda AustraliaNissan AustraliaRenaultUS Federal Trade Commission

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