It's 'Supplier Beware' Online

FRAMINGHAM (03/27/2000) - "Buyer beware" is the saying, but increasingly, it's the suppliers who must watch their bottom lines while doing business at online marketplaces.

Consider Molecular Probes Inc., which sells specialty chemicals both directly to research scientists and online via www.Chemdex.com and www.SciQuest.com.

Off-line sales net a profit of between 10 percent and 15 percent for the Eugene, Oregon, supplier. Most online sales, by contrast, bring in just 5 percent because there's a 5 percent cut to the online marketplaces.

"There's definitely not as much benefit online from the supplier's side as from the buyer's side. The No. 1 reason we do it is as a convenience to customers" who want one-stop online shopping, said Molecular Probes product manager Ian Johnson.

The "suppliers are getting squeezed," said Steven Kafka, an analyst at Forrester Research Inc. in Cambridge, Massachusetts.

Price erosion, triggered by the effortlessness of comparison shopping online, and the challenge of finding a way to differentiate their products and services from thousands of competitors' listings on the same exchanges are also big dilemmas for suppliers.

It's also not at all clear that a significant number of suppliers' customers are ready or willing to do business online. Firms currently doing business online report that this form of commerce provides less than 5 percent of their revenue, according to a recent study by PricewaterhouseCoopers. The users also list the low use of e-commerce by customers as one of the major barriers to electronicbusiness.

"Some of our customers now don't even want to use the telephone or fax machines. They want a salesperson standing in front of their desk every Monday morning with a box of doughnuts," said David Hannah, president and CEO of Reliance Steel & Aluminum Co., a $1.5 billion Los Angeles-based supplier of metal products. Yet Reliance sells its products online at www.Materialnet. com, which Hannah describes as "another tool and an extension of our sales force."

There's also the expensive and highly complex task of integrating suppliers' enterprise systems with those of the multiple exchanges cropping up in virtually every industry.

In the past six months, for example, more than a dozen new exchanges have appeared in the oil industry. And the printing industry is up to more than 20 online marketplaces. Until a clear winner emerges in their particular industries, suppliers are more or less forced to sign on to several or all of them, analysts said.

"If a company is a supplier to Kmart, Target and Wal-Mart, it's likely [it will] need to be on several exchanges, and it takes time and resources to post [electronic] catalogs to different sites plus integrate back-end systems," said Gene Alvarez, an analyst at Meta Group Inc. in Stamford, Connecticut.

"The announcements make things sound so simple, but it's not simple. There's a lot of things under the covers," Alvarez said.

No Automatic Rewards

It's also a mistake for suppliers to assume that simply participating in a digital marketplace will automatically open up new markets and bring new customers, said David Krauthamer, director of information technology at Advanced Fibre Communications Inc., a maker of telecommunications equipment in Petaluma, California.

For example, in the manufacturing arena, the vast majority of business-to-business buying involves products that are custom-engineered to rigid specifications and sourced from one or two prequalified suppliers, Krauthamer said.

Big Suppliers Rule

"If you are a Ford or a GM, you are not quickly going to start buying from a small company" just because it's listed in a digital marketplace, said Andy Chatha, president of ARC Advisory Group Inc., a consultancy in Dedham, Massachusetts.

"Support is very, very important. [So] such companies are going to continue buying [critical components] from big suppliers," he said.

Despite this, there is a crucial need to maintain a presence in these exchanges if only for the wider marketing visibility they promise, said Andy Andrews, an export sales manager at Paratherm Corp., a Conshohocken, Pennsylvania-based manufacturer of specialty heat-transfer fluids.

Andrews doesn't see much value in compromising margins - and risking commoditizing his products - by participating in online auctions just to attract new customers.

The goal of participating in these exchanges is to deliver more information and make potential buyers "realize that these are [differentiated] engineered products" requiring postsales support, said Andrews. The only way to maintain margins in these exchanges is "to try to promote a dialogue rather than simply attract new customers," he said.

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